Events are unfolding — or perhaps more appropriately, unraveling — quickly in China's beleaguered real estate sector. Until now, China's central government, reticent to take any action that might signal a retreat from its broader pledges to reform and rebalance the country's economy away from export- and investment-driven growth, has shied away from launching nationwide measures to support the real estate sector. Instead, it has allowed local governments to relax restrictions as needed while directing more of its own funds into strategic infrastructure projects.
Several developments throughout this week have reinforced that strategy, at least superficially. On Wednesday, Wuhan became the latest major city to eliminate restrictions on home purchases, a move entirely consistent with the Chinese government's strategy thus far. Wuhan's announcement came a day after China's Big Four state-owned banks denied reports, spawned by rumors from Sept. 22, that they would collectively launch new mortgage policies designed to enable more housing purchases. Such a move would have been the first real signal of centrally coordinated action on behalf of the nationwide housing sector.
These developments followed more ominous signs of the effects of China's housing downturn on local communities, as well as the ways isolated problems can spread if not addressed proactively. Since Monday, local governments in at least five cities in Hebei province, including the key northern industrial hub Handan, have faced protests involving hundreds of demonstrators as investors in collapsing underground financing schemes tied to real estate and building materials industries petitioned the government for help in recovering their funds. According to Xinhua, the central government has sent teams of investigators to Handan in part to prevent property developers tied to the failed schemes from fleeing. The authorities have not yet said what will come of these developers, but a highly public trial is more likely than a bailout.
The protests in Hebei are decidedly local, as are Wuhan's policy adjustments. Neither is yet important nationally, let alone worldwide. But they take place against a background of profound global significance: the inexorable decline of a constellation of industries that for six years have underpinned China's economic, social and political stability. The outstanding question is just how serious the looming correction will be, or rather how serious China's central leaders will allow it to become.
China's Ongoing Strategy
In fact, China's central government has made clear its intent to encourage the descent of nationwide property markets from the Olympian heights of recent years, when average home prices — driven by a speculative frenzy among individual and institutional investors and fueled further by local governments' reliance on land sales for revenues — rose to well over 15 times average workers' salaries in many major cities. For China's leaders, maintaining an ample supply of affordable housing is essential for broader efforts to rebalance the country's economy from its heavy reliance on construction-related investment to greater dependence on the consumer power of China's burgeoning urban middle classes.
At the same time, as Chinese leaders undoubtedly understand, too precipitous a decline in home prices could wreak havoc on local economies across the country. In many cities, especially in parts of central and northern China that are more reliant on building materials, resources and other construction-related heavy industries, a sudden collapse in home prices would almost certainly lead to significant debt repayment issues by local corporations and governments. It would perhaps even lead to defaults and bankruptcies by local banks and other financial institutions, ultimately spawning local employment crises. Such crises are possibly unavoidable in China's most debt-ridden localities, and Beijing has made it clear that it can tolerate a handful of local economic and employment shocks so long as national employment levels remain stable.
Nonetheless, preferring to head off any crises before they emerge, Beijing has in recent months allowed local governments across China to relax home purchase restrictions when needed in order to maintain stable local demand. The central government wants the market to correct, but slowly and steadily in a manner that is not destabilizing. In the meantime, Beijing's strategy has been to let local leaders pursue what amount to pro-growth measures while refraining from such measures itself. In part, this may indicate that Chinese leaders do not yet believe the sector is in critical condition nationwide. It likely also reflects their desire to maintain confidence, both at home and abroad, in their commitment to reform.
Benefits and Risks
The Sept. 22 report that China's Big Four state-owned banks will essentially adopt a pro-growth measure in housing markets nationwide appeared to signal that Beijing is tentatively abandoning its prior strategy of targeted, localized measures. This came shortly after China's central bank injected around $80 billion into the country's five largest banks — a move that, while not directly tied to the property sector, certainly indicates central government concern over the health of the broader economy. But in light of the subsequent denials by the Big Four of the rumors regarding their new mortgage policies, Beijing's original strategy appears to remain intact — for now.
It is difficult to say whether local measures and targeted investments by Beijing will be enough to prevent crisis-inducing home price and sales declines in most Chinese cities. Precedent suggests such efforts will prove sufficient. But since the beginning of China's housing and construction boom in the mid-1990s, there has never been a housing decline quite like this: a nationwide trend driven not by external disruption but by the market's sheer overcapacity and lack of inherent demand. If in the coming months that engine begins to cool more quickly, China's government will have no option but to intervene — or risk the intolerable effects of a genuine market correction.