China Is Finally Trying to Fix Its Housing Crisis

More than a year after one of China’s biggest real estate developers began to collapse, trouble has rippled through cities across the country. Dozens of other developers have also missed debt payments, the sale of new homes has plunged and construction cranes have come to a standstill at many sites.

This week the Chinese government, which until now has stayed largely on the sidelines of the country’s housing crash, has taken its most forceful steps so far to try to minimize the damage from the turmoil that has enveloped China Evergrande Group, the world’s most heavily indebted developer, and many of its competitors.

Real estate development plays an outsize role in China’s economy, representing about a quarter of economic output and a quarter of its bank loans. Housing represents at least three-fifths of household assets in China, and many Chinese regard apartments as the only reliable way to build wealth.

This week’s intervention by the government took on greater urgency as Covid-19 cases hit record levels. The infections have prompted a new wave of strict lockdowns that are disrupting factories and other businesses, cutting into spending by consumers, and preventing home buyers from visiting apartment complex showrooms. This has further strained an economy already under severe pressure.

China’s cabinet called late Wednesday for banks, most of which are state-owned, to lend more money for the completion of unfinished apartments, following a similar directive by regulators put out hours earlier. China’s central bank, the People’s Bank of China, and the main bank regulator codified 16 measures on the same day to make sure that developers can borrow enough money from banks and bond investors, and can defer repayment when necessary. And on Friday evening, the central bank reduced by $70 billion the money that the country’s commercial banks are together required to hold for emergencies, freeing them to lend that money instead.

An affiliate of the central bank agreed earlier this month to guarantee the repayment of new bonds issued by some of the less distressed real estate developers, in effect assuring investors it was safe to lend to the companies.

The finance ministry has enacted a tax break for people who buy a new home within a year of selling the previous one.

Acting on instructions from the cabinet and bank regulators, China’s biggest banks gave lines of credit this week to large developers. The Industrial and Commercial Bank of China announced on Thursday that it had issued lines of credit totaling $91 billion to 12 developers. Bank of Communications gave a $14 billion line of credit to Vanke, China’s biggest developer.

Yi Gang, the governor of the central bank, declared that the government was willing to use its policy tools to stabilize the country’s huge real estate sector.

“China’s housing sector is linked to a lot of upstream and downstream industries, so its healthy development is of great significance to the overall economy,” Mr. Yi said in a speech on Monday.

Financial regulators in China are under pressure to rebuild public confidence in the real estate sector. Domestic and international investors have been selling bonds and other assets and moving money out of the country as worries persist about the economy, which is expected to grow at barely half of Beijing’s target of 5.5 percent this year. Speculation is rising that Xi Jinping, China’s leader, may raise taxes on the affluent to pay for more social spending.

Bond prices have fallen this autumn in Shanghai trading, driving up yields and making it more expensive for developers to borrow without government help. Lightly regulated wealth management funds, many of which use borrowed money to place big bets in bond markets, have seen investors withdraw large sums — another sign of the broad financial duress also affecting housing.

Just as China’s health policy has become stuck in an inflexible “zero Covid” stance of lockdowns and mass testing, China’s housing policy is also deadlocked. Strong positions taken by Mr. Xi have complicated the resolution of the housing crisis and the Covid policy.

With exports falling right now and consumer spending weak during widespread Covid lockdowns, the economy is even more dependent on housing.

“To save the property market is to save the economy,” said Han Xiuyun, an associate professor of economics at Tsinghua University, in an online analysis.

In housing, the crucial issue lies in whether the government should once again tolerate people using housing investments as a way to make money, rather than simply as a place to live. Mr. Xi had proclaimed in 2016 that “housing is for shelter, not speculation,” an idea that became government policy two years ago. The country’s housing ministry imposed a “three red lines” policy that put guardrails around how much developers could borrow.

The goal was to prevent developers from borrowing excessively and plowing the money into speculative projects, while also constraining banks from lending too much. Crossing even one red line put pressure on developers to start paying back debt, and that quickly strained their finances.

The housing ministry has left the three red lines policy in place even as at least three dozen real estate developers have missed payments on one or more bonds, mainly overseas bonds.

China’s housing market was already inflated and might have crashed even without the tougher policy, some analysts believe, after home prices soared over the past quarter century.

Oxford Economics calculated this week that prices for newly built homes across China reached 8.5 times average household disposable income last year. In the United States, that ratio peaked at 5.8 times in 2007, before the American housing bubble burst.

Some economists say that Mr. Xi was right to address speculation, but that the policy response needs to be more carefully crafted.

“Even though the direction of the policy of ‘housing is for living not speculation’ is correct, the implementation of the policy may require fine tuning in light of market conditions,” Zhu Ning, the deputy dean of the Shanghai Advanced Institute of Finance, said.

This week’s burst of regulatory activity could mark the start of that fine tuning.

An affiliate of the central bank has begun providing guarantees for $35 billion worth of bonds to be issued by the country’s real estate developers. Government guarantees will allow the developers to sell new bonds at low interest rates to the state-controlled banks.

The proceeds of the new bonds will then be used to repay or buy back existing bonds. The aim is to relieve steep interest costs facing developers.

Under another of the measures released this week, the China Banking and Insurance Regulatory Commission has separately told banks that they can delay collecting interest and principal payments from real estate developers for a year. That deferral allows China’s commercial banking system to avoid recording a big wave of troubled loans, which would otherwise depress profits.

The housing ministry has begun allowing local governments to dismantle their extensive limits on who can buy apartments. Many cities had discouraged out-of-town investors from buying homes until now, so as to make apartments less expensive for longtime residents.

Finally, China’s Ministry of Finance has approved a temporary tax break designed to make sure that investors keep their money in the property market. The rule says that the 20 percent tax on gains from selling real estate can be avoided if the proceeds from the sale are invested into another real estate acquisition within 12 months.

The tax break, which resembles the so-called Section 1031 tax provision for real estate investors in the United States, expires at the end of next year. The goal is to encourage people sitting on large gains in the value of their homes to trade up to newer and larger apartments. That might help revive at least part of China’s huge construction industry.

The longer-term problem is that the vast movement of rural residents to cities that began in the 1980s has slowed as villages have been drained of people, while the country’s birthrate has plunged. Oxford Economics estimated this week that housing demand was 8 million units per year from 2010 through 2019, but would drop to only 4.6 million per year from next year through 2030.

The dilemma for Beijing lies in how to manage the decline of the construction industry and many associated industries, from steel and cement to furniture and washing machines.

The construction sector “has to shrink,” George Magnus, an associate at the China Center at Oxford University, said. “The question is how, and at what cost.”

Li You contributed research.