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China's State Council Plans to Address Property Slump, Sparks Rally in Developer Shares

China's State Council to discuss property market support, signaling major steps to address housing slump and boost economy.

By Athena Xu

5/16, 15:54 EDT
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Key Takeaway

  • China's State Council plans to address the property slump by potentially turning unsold homes into affordable housing, sparking a rally in developer shares.
  • Financial challenges loom as at least 1 trillion yuan may be needed for the housing initiative amid concerns over local government and bank debts.
  • Policy adjustments include a likely reserve ratio cut by the PBOC and measures to enhance Hong Kong's financial market, aiming to stabilize the economy.

Addressing the Housing Crisis

China's government is taking significant steps to address the ongoing property market slump, which has become a major concern for the world's second-largest economy. A meeting scheduled by the State Council for Friday morning, involving senior officials from various sectors including the housing ministry, financial regulators, local governments, and state banks, underscores the urgency and breadth of the response. The meeting aims to discuss proposals, including one to clear excess housing inventory by having local governments buy millions of unsold homes. This initiative could potentially transform these properties into affordable housing, a move that has sparked a notable rally in shares of Chinese developers.

The State Council's proactive approach, seeking feedback to finalize a draft plan by June, indicates a comprehensive strategy to revitalize the property market. The involvement of senior officials from the PBOC, National Financial Regulatory Administration, Ministry of Housing and Urban-Rural Development, and Ministry of Natural Resources in a briefing about ensuring home delivery further highlights the coordinated effort across different levels of government and the financial sector.

Financial Implications and Market Response

The proposal to address the housing glut has led to a surge in optimism among investors, as evidenced by a 14% increase in a Bloomberg gauge of Chinese real estate stocks, with significant gains for companies like Sino-Ocean Group Holding Ltd. and China Vanke Co. This market reaction reflects confidence in the government's commitment to reviving the property sector, despite concerns about the financial strain on local governments and banks. The potential financial burden is considerable, with estimates suggesting that at least 1 trillion yuan ($139 billion) may be needed to purchase unsold homes.

The financial challenges are compounded by the high debt levels of local governments, which have soared to 56% of GDP, and the pressure on banks' balance sheets from rising bad loans and narrowing margins. These factors underscore the complexity of the situation and the need for a carefully calibrated response.

Policy Adjustments and Broader Economic Strategy

In response to the property sector's challenges and broader economic concerns, China is adjusting its monetary policy and financial market strategies. The People's Bank of China is expected to cut the required reserve ratio next month, a move aimed at addressing capital outflows and liquidity issues. Additionally, the cessation of real-time foreign flow data sharing by the Shanghai and Shenzhen exchanges is intended to mitigate the impact of foreign fund movements on domestic markets.

Efforts to enhance Hong Kong's financial market, including a dividend tax exemption for individual investors and the expansion of the Stock Connect program, are part of China's strategy to reinforce its position as a global financial hub. These measures, along with the proposal to tackle the housing inventory glut, reflect a multifaceted approach to stabilizing the economy and boosting market sentiment.