After years of campaigning to tame property prices, China is increasing its stakes to break a persistent profit cycle that has made homes increasingly unaffordable.

In the past few days, China has hiked mortgage rates in a major city, promised to accelerate the development of government-subsidized rental housing, and looked more closely at everything from developer financing to newly listed property prices to property transfers. Following Xi Jinping's famous words that "Housing is for living, not for speculating," added Vice Prime Minister Han Zheng that the sector should not be used as a short-term tool to stimulate the economy.

The increased focus on real estate – an industry that has already been under the scanner – reflects wider crackdowns on companies like education, which are viewed as growing social inequalities. As China's economy slows and President Xi seeks to increase the country's birth rate, the policy underscores the Communist Party's growing determination to respond to growing dissatisfaction with hoarded wealth and narrow career opportunities.

"China's real estate sector has been one of the biggest causes of dissatisfaction and the government is determined to control prices so it doesn't lead to social unrest," said Liao Ming from Beijing, a founding partner of Prospect Avenue Capital. "The measures reflect the political containments in education as they aim to alleviate public fear of inequality."

While China has been trying to cut property prices for years, analysts say this crackdown will be different. A clear signal came in the comments of Vice Prime Minister Hans to turn away from the use of real estate in order to stimulate the economy in the short term.

"In the past, Beijing has consistently used the real estate sector to stabilize overall growth," wrote Nomura analysts, led by Lu Ting, in a research note, adding that they expect Beijing to change its playbook. Policy makers will not lift real estate restrictions this time, in part due to concerns about a systemic financial crisis, analysts wrote.

Another signal came from the unusually large number of government agencies that recently pledged to step up action in everything from project development and home sales to rental and property management services. Eight political bodies announced in a joint statement that they would increase the penalties for wrongdoing. In the line of fire will be developers who default on debt payments, delay deliveries of pre-sold homes, or cause negative news or market concerns.

The careers of local bureaucrats are at stake. Officials in cities that lack adequate regulations and are experiencing rapid price spikes will be held accountable, said Zhang Qiguang, an official with the Ministry of Housing and Rural Development on July 22nd.

On Monday, a comment from the Xinhua state media urged governments across the country to keep house prices at reasonable levels and make this an urgent task.

"New residents and young people cannot afford to buy or rent good houses," says the editorial team. "In cities with new arrivals and metropolises, these problems are particularly acute."

Troubled developers

Investors responded by selling property stocks, with the latest news stream putting pressure on developers who were already forced to deleverage and meet China's "three red lines" on debt metrics.

China Evergrande Group's stock barely changed until 2:13 p.m. after collapsing more than 40% in just under two weeks. A Bloomberg Intelligence index of 33 major Chinese developers, mainly traded in Hong Kong, fell for the fourth day in a row on Wednesday.

China Chengxin International Credit Rating revised its outlook for the country's real estate sector from stable to negative on Monday, citing concerns about monetary tightening and weakened investor confidence.

"Owning real estate is a major contributor to worsening income inequality in China, so the crackdown will come and be tough," said Alicia Garcia Herrero, Hong Kong-based chief economist, Asia-Pacific at Natixis. The cost of mortgages will go up, especially for those with multiple homes, as well as things like property tax, she estimates.

The guidelines are here to stay, wrote Ren Yi, the social media commentator and prince trained at Harvard University, aka Chairman Rabbit, in an online commentary.

"Leaders are looking at this issue from a wider perspective, property is not just an economic tool, it is at the root of all social, economic and political problems and needs to be addressed," said Ren.

Balance risks

The Chinese government has to maintain a delicate balance. According to Marc Rubinstein, a former hedge fund manager who writes on finance today, real estate accounts for 13% of the economy, up from just 5% in 1995.

Political missteps could have unintended consequences for the banking system. Chinese banks had over 50 trillion yuan ($ 7.7 trillion) in outstanding loans to the real estate sector, more than any other industry, and accounted for about 28% of the country's total lending.

Of these loans, about 35.7 trillion yuan were home mortgage loans and 12.4 trillion yuan for real estate development, according to official sources.

But all signs point to the government's determination to ensure social stability, even if it means short-term turmoil for capital markets. As recently as June, China Banking and Insurance Regulatory Commission chairman Guo Shuqing warned against betting that house prices will never fall.

"Ownership is the number one source of financial risk and wealth inequality in China," said Larry Hu, head of China Economics at Macquarie Securities Ltd.

source https://seapointrealtors.com/2021/07/28/in-its-latest-crackdown-china-intensifies-focus-on-real-estate-bankruptcy-news/

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