Economists and property experts have called upon the Chinese government to stimulate home prices and resolve local debt problems that were highlighted when housing markets slumped last month.
The People’s Bank of China (PBoC), the country’s central bank, on Tuesday lowered the one-year loan prime rate (LPR) from 3.65% to 3.55%, and also cut the five-year rate from 4.3% to 4.2%. It is the first time the bank has slashed LPRs in 10 months, following last week’s reduction of the medium-term lending rate from 2.75% to 2.65%.
The move also follows an announcement by the National Bureau of Statistics (NBS) on June 16 that more Chinese cities had recorded property price drops in May than in April.
Some analysts said property developers had tried to raise prices in April but then faced huge resistance from homebuyers, so they cut prices again in May. They said such a trend resulted in downward pressure on the secondary markets in most Chinese cities last month.
Some property experts and economists say the worsening local government debt problems have hurt homebuyers’ confidence in recent months. Media reports say Yunan, Guizhou and Guangxi provinces have warned that they may default this year.
Zhao Yanjing, vice president of the China Association of City Planning and a professor at Xiamen University, says in an article that the central government should help local governments resolve their debt problems, prevent them from selling lands at discounts, extend bank loans for families, companies and local governments, and also limit capital outflow.
“China’s current economic slowdown is not related to external trade, which has remained stable over the past three years despite the negative impact of the trade war, the Russian-Ukrainian war and the epidemic,” he says. “The real cause of the crisis is that we have a big debt problem on our balance sheets.”
He adds: “Since July 2021, property markets have been suppressed by policies, leaving a lot of homes and land in the markets. In this situation, families, companies and local governments dumped their assets, resulting in further contraction in asset prices and a vicious cycle of debt problems.”
He says the central government should bail out the heavily-indebted local governments – because it was the center that had capped land prices and that also had taken away some of the local governments’ land sales revenue in the past, making them unable to repay their debts. He says the central government should purchase the local governments’ non-performing assets and revitalize them.
He warns that China will face an economic recession if no actions are taken.
Local government debts
Zhao’s comments were first made in a forum organized by the CITIC Foundation for Reform and Development Studies on February 25. They were summarised by CITIC Group’s Economic Herald and reprinted by Guancha.cn on Monday.
The Economic Herald on June 15 also published a series about what the central government should do to resolve the worsening local debt problems.
Zhang Ming, a financial expert at the CITIC Foundation for Reform and Development Studies, says in one of the articles that the central government’s property curbs have hurt property developers’ income and ability to buy lands in recent years. Zhang says that, because local governments could not generate enough revenue through land sales, they turned to further borrowing to continue their investment projects.
“At present,” Zhang says, “local governments are facing huge expense pressures. They should be allowed to impose new taxes, such as consumption tax, and to transfer some of their medical and social security expenses to the central government as they cope with aging populations. In the future, we should base appraisals of local governments not only on their GDP growth but also on the scale of their indebtedness.”
Citing the International Monetary Fund’s data, Zhang says China’s total government debt-to-GDP ratio was about 108% as of mid-2022, which is not high when compared with the United States’ 110%. However, he says it’s unhealthy that local governments, not the central government, are bearing most of these debts.
According to China’s Ministry of Finance, the outstanding amount of local government debt grew 15.1% to 35.06 trillion yuan ($5.02 trillion) at the end of last year from 30.47 trillion yuan a year earlier.
Sluggish property markets
On June 15, the NBS said that 24 out of 70 major Chinese cities recorded year-on-year price drops for their newly-built properties in May, compared with only seven in April. It said 55 cities reported property price drops in their secondary markets in May, compared with 34 in April.
In the first five months of this year, overall property prices fell 0.9% from the same period of last year.
“The real estate market is still recovering and facing many challenges,” NBS spokesperson Fu Linghui said in a media briefing. “In the next stage, the Chinese economy will continue to recover, and the government’s supportive measures will show effects. Market expectations will also improve, helping to stabilize home prices.”
“Property prices have declined month-on-month for two consecutive months, April and May, meaning that the small rebound in the first quarter failed to carry over,” said Yan Yuejin, director of the research center of E-house China. “Due to rising sales pressures, property developers slashed prices significantly in some cities last month, hurting the overall markets.”
Chief researcher Li Yujia of the Guangdong provincial residential policy research center said price-sensitive young homebuyers were scared away when property developers tried to raise prices in April. Li said property developers then cut prices again.
Although the PBoC lowered the loan prime rate by 10 basis points on Tuesday, some analysts said it is not strong enough to turn around the unfavorable market situations.
Chen Wenjing, market research director of the China Index Academy’s index division, writes in a research note that, as the downward pressure in the property markets is growing, more and more people are expecting that the government and the central bank will unveil new supportive measures.
She says property developers probably will be able to borrow more easily and slow their sales campaigns while regulators will launch new rules to lower property transaction costs.
Read: China retail sales growth slow, job markets shaky
Follow Jeff Pao on Twitter at @jeffpao3