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China Property Stocks Up 14% on New Gov Buyback Plan

China considers buying unsold homes to tackle real estate crisis, sparking a 14% rally in property stocks.

By Bill Bullington

5/15, 20:33 EDT

Key Takeaway

  • China's proposal for local governments to buy unsold homes boosts property stocks by 14%, signaling investor optimism in real estate stabilization efforts.
  • Concerns arise over the financial strain on local governments and banks due to high debt levels, amidst capital outflows and liquidity issues.
  • Policy adjustments, including a potential reserve ratio cut and measures to bolster Hong Kong's market, aim to support the economy amid real estate and capital challenges.

China's Property Market Intervention

China is considering a groundbreaking proposal to have local governments purchase millions of unsold homes to alleviate the ongoing real estate crisis. This initiative, aimed at converting these properties into affordable housing, involves local state-owned enterprises buying homes from distressed developers at significant discounts, with financing provided by state banks. This measure, still under review by the State Council, represents a more aggressive approach than previous efforts to manage the housing inventory crisis. The real estate sector's downturn has seen home sales drop by approximately 47% in the first four months of the year, with unsold housing inventory at an eight-year high, posing a considerable risk to the economy and potentially affecting up to 5 million people with unemployment or reduced incomes.

Market and Economic Reactions

Following the announcement of the potential government intervention, a gauge of Chinese property stocks rallied about 14%, indicating investor optimism towards government measures aimed at stabilizing the real estate sector. However, there are concerns about the financial strain this plan could place on local governments and banks, given the already high levels of debt and the pressure from rising bad loans and shrinking margins. Additionally, China faces significant capital outflows and liquidity concerns, with recent financial data showing disappointing growth in money supply. The People's Bank of China is expected to cut the required reserve ratio next month to address these issues, alongside managing the yuan's value to prevent further weakening.

Policy Adjustments and Market Sentiment

In response to the liquidity squeeze and to stabilize market sentiment, China is adjusting its monetary policy and financial market strategies. This includes halting the sharing of real-time foreign flow data by the Shanghai and Shenzhen exchanges to mitigate the immediate impact of foreign fund movements on domestic markets. Furthermore, measures to enhance Hong Kong's financial market, such as a dividend tax exemption for individual investors and the expansion of the Stock Connect program, are part of China's broader strategy to reinforce its position as a global financial hub. These policy shifts aim to support the economy and market dynamics amid the challenges posed by the real estate crisis and capital outflows.