1 Beijing’s measures in support of real estate loans remain a work in progress
Jan. 22
China Index Academy released the following data in its 2023 national foreclosure market monitoring report (2023年全國止贖市場監測報告):
- There were 796,000 foreclosed properties of all types in 335 cities nationwide in 2023, an increase of 36.7 percent (583,000 foreclosed properties) from a year ago.
- There were 149,000 property transactions in 2023 (compared with 118,000 in 2022), with a transaction rate of 18.7 percent (compared with 21.7 percent in 2022).
- The total property transaction amount of 300.41 billion yuan in 2023 was slightly lower than the 300.46 billion yuan in 2022. Of the total:
- Residential foreclosure listings increased by 43.01 percent year-on-year to 389,000 listings (48.9 percent of total). Sales of residential property increased by 17.55 percent year-on-year to 99,000 units. The transaction rate of residential property was 25.4 percent (compared with 30.9 percent in 2022) and the average discount of transactions was 19.1 percent off (compared with 17.6 percent off in 2022).
- Commercial property foreclosure listings increased by 22.5 percent year-on-year to 224,000 listings. Sales of commercial property increased by 10.5 percent year-on-year to 27,000 units. The transaction rate of commercial property was 12 percent (compared with 13.4 percent in 2022) and the average discount was 29.5 percent off (compared with 30 percent off in 2022)
- More than 20,000 properties of various types were foreclosed in 19 provinces. Over 40,000 properties were foreclosed in Sichuan, Guangdong, Henan, Chongqing, and Jiangsu, with Sichuan and Guangdong ranking first (over 100,000 properties) and second (over 60,000 properties).
Jan. 25
Xiao Yuanqi, deputy director of the National Administration of Financial Regulation, said at a press conference that the regulator would guide financial institutions to “maintain the overall stability of real estate loans and meet reasonable financing needs.”
Xiao introduced the NAFR’s recent key tasks as follows:
- Promote the implementation and effectiveness of the urban real estate financing coordination mechanism.
- On Jan. 5, the Ministry of Housing and Urban-Rural Development and the China Banking and Insurance Regulatory Commission issued a notice (建立城市房地產融資協調機制的通知) requiring their respective local departments to establish real estate financing coordination mechanisms in their respective areas. The local departments were instructed to select real estate enterprises eligible for financing support, focusing on projects with “normal development and construction” (i.e. not having problems with completing the project), sufficient collateral, a reasonable asset-liability ratio, and secure repayment sources.
- Guide financial institutions to effectively implement management requirements for operational property loans.
- On Jan. 24, the NAFR and the People’s Bank of China issued a notice (關於做好經營性物業貸款管理的通知) allowing banks to issue operational property loans to real estate development enterprises with “standardized operations” and “promising prospects.” The loans can be used by real estate enterprises to make repayments before the end of the year on outstanding loans and open market bonds issued by enterprises.
- Continue to provide personal housing loan financial services.
- Guide and require banks and other financial institutions to vigorously support the construction of the “three major projects” (三大工程), including major infrastructure for “normal and emergency uses” (平急兩用) and urban village redevelopment.
Jan. 26
The Ministry of Housing and Urban-Rural Development held an urban real estate financing coordination mechanism deployment meeting.
Ni Hong, the minister of housing and urban-rural development, said at the meeting that the development and construction of real estate projects should be supported and the “reasonable financing needs” of real estate enterprises should be met without discrimination.
The meeting said that all local governments should focus on projects, promptly produce a list of projects eligible for financing support after research, and coordinate the granting of loans by financial institutions within their respective regions. The localities should issue loans to projects after their lists are finalized before the end of January.
The meeting also granted cities “full autonomy” in real estate regulation, including the adjustment of real estate policies according to local conditions.
Jan. 27
The General Office of the Guangzhou municipal authorities issued a notice announcing the relaxation of property purchase restrictions.
The notice said that there would be no purchase restrictions for residential real estate with floor area exceeding 120 square meters. Individuals who own two properties but have one listed for rental or sale are allowed to purchase another property.
Backdrop
1. According to data on China’s real estate industry for 2023 released by the National Bureau of Statistics in January, the area of newly started housing construction and the area of commercial housing sold in 2023 had regressed to levels seen more than a decade ago.
2. China’s stock markets plummeted after the NBS announced that China’s GDP grew by 5.2 percent in 2023. The decline was eventually stabilized after the “national team” stepped in and the central bank announced a cut to the reserve requirement ratio.
Our take
1. The data on property foreclosures in China in 2023 reflects a deepening of the property sector crisis and indicates that real estate sector debt problems are spreading to the financial system.
Foreclosed properties can result from borrowers either defaulting on loans or being unable to meet their mortgage obligations. The process from the initiation of loan default to entering foreclosure proceedings generally takes at least six months. This suggests that the actual number of properties facing default could be greater than the current inventory listed for foreclosure.
The substantial surge in the number of foreclosed properties indicates a corresponding rise in associated debts, notably contributing to a spike in non-performing loans for banks. The spike in foreclosures also indirectly reflects a deterioration in China’s economic conditions in 2023 compared to 2022 when there was a pandemic and lockdowns. As Chinese people’s income shrinks and the PRC authorities rescue policies show limited efficacy, many individuals find themselves unable to fulfill their debt obligations.
In 2023, the number of properties listed for foreclosure surged by 43.01 percent, representing an increase of 213,000 units. However, the actual transaction volume only experienced a modest uptick of 31,000 units compared to the preceding year, and the total transaction amount ended up slightly lower. This points to a limited market capacity to absorb these properties, resulting in an ongoing decline in foreclosure property prices. Notably, the discount rate for residential foreclosed properties, comprising nearly half at 48.9 percent, decreased by 1.5 percent compared to the previous year.
2. Xiao Yuanqi’s remarks about supporting real estate loans and the Ministry of Housing and Urban-Rural Development’s call to implement financing support for real estate enterprises as soon as possible currently appear to be more propaganda than substance as PRC authorities still have some ways to go before the measure can be implemented.
For one, the two policies that Xiao mentioned are similar to some that were announced in the second half of 2023. All those policies, however, are so-called “notices,” “guidelines,” and “requirements” for the localities to establish real estate financing coordination mechanisms. Until those mechanisms are set up, the PRC authorities do not have the capacity to support real estate enterprises in need.
In his remarks, Xiao mentioned that real estate enterprises with “sufficient collateral, a reasonable asset-liability ratio, and secure repayment sources” are eligible to receive financing support. However, real estate enterprises that are facing debt problems may not have “sufficient collateral” to pledge. Meanwhile, enterprises with high-quality collateral do not need “guidance” from regulators and have long been targeted by financial institutions that are eager to issue loans.
Beijing’s earlier policies to boost real estate loans appear to be having a limited effect at best. In November 2023, mainland media reported that the financial regulatory authorities had proposed the so-called “three no lower than” (三個不低於) measure to financial institutions to encourage them to lend to real estate enterprises. The authorities also came up with a “white list” of 50 state-owned and private real estate firms that are eligible for financing. However, mainland media Jiemian News noted in a December 2023 report that a banking insider observed that the banks did not “loan out a single cent in the end” to real estate enterprises. We analyzed at the time that financial institutions “do not want the risks of lending to real estate companies when the PRC authorities have not clarified who will take the final responsibility for their ‘three no lower than’ measure.”
China’s real estate crisis is the outcome of decades of misguided and short-term economic policies under CCP rule. Resolving the crisis will require much more than Beijing urging financial institutions to make financing available to a relatively small pool of qualified real estate enterprises. Beijing also cannot loosen lending guidance for financial institutions without facilitating financial contagion. Under such circumstances, the PRC authorities’ trumpeting of loan support to ailing property developers is unlikely to be properly implemented and will remain wishful propaganda.
3. The Jan. 26 meeting of the Ministry of Housing and Urban-Rural Development on urban real estate financing coordination mechanism deployment is a nascent sign that the central authorities are willing to grant the localities more initiative to fix their problems. Aside from granting cities “full autonomy” in real estate regulation, the meeting also did not mention “houses are for living in, not speculation” even as it urged the localities to “implement the spirit of the Central Work Economic Conference.”
Beijing’s willingness to grant local governments more leeway in handling their respective real estate issues is a pragmatic move by the Xi leadership. The move, however, also indirectly highlights the shortcomings of Xi Jinping’s economic policies.
The central authorities risk having numerous real estate enterprises collapse as their funding dries up. According to publicly available data, about 1.38 trillion yuan worth of onshore real estate bonds will mature in 2024, or a decrease of 30 percent as compared to 2023. Real estate sales, however, declined by 8.5 percent in 2023 and fundamental improvement in the Chinese economy remained elusive. To avert a surge of unfinished projects and a worsening of the debt situation for real estate enterprises, Beijing is relinquishing some of its control over real estate policy in the localities and encouraging financial institutions to lend to “qualified” real estate enterprises.
Granting the localities “full autonomy” in real estate regulation potentially implies the lifting of price restrictions. This technically allows real estate companies to strategically lower property prices and recoup some funds to make debt payments. However, a significant reduction in property prices could trigger more debt risks as the value of real estate being used as collateral depreciates. Declining prices could also cause hesitancy among prospective buyers as they wait for prices to bottom out before making a purchase. All in all, Beijing’s relaxation of control over local governments, which it currently seems to believe is the lesser of two evils, could bring greater risks to the property and financial sectors, as well as to the CCP regime more broadly.
2 Institutional reforms in Xiamen hint at financial shortages and the PRC’s security priorities
Xiamen, a sub-provincial city in Fujian Province, implemented a new round of institutional reforms.
According to mainland media reporting on Jan. 21, the implementation plan noted that the Xiamen authorities were given “strict control” over the total number of administrative and institutional staffing positions (行政編制 and 事業編製):
- At the municipal level, the administrative staffing of Party and mass organizations will be uniformly reduced by 3 percent. The Xiamen public security, judicial, and maritime court would be excluded from making staffing reductions.
- Units that remain overstaffed after the reductions will “resolve” their staffing issues through “natural attrition” and other measures within a period of five years.
- The funding recouped from staffing reductions will be transferred to a special management account and its reallocation will be coordinated by the Xiamen municipal Party Committee.
Background
1. The CCP Central Committee and PRC State Council’s plan for Party and state institutional reform that was introduced at the 2023 “Two Session” called for reducing staff at central Party and state institutions by 5 percent. The plan also noted that staffing resource reductions at local Party and state institutions would be left to the discretion of provincial level Party Committees.
2. According to mainland media reports from 2023, central government departments and their directly affiliated agencies had recruited 39,600 civil servants for 2024, or an increase of 6.7 percent (2,500 people) from the previous year.
The PRC authorities also planned to:
- Have plans to recruit 26,000 fresh university graduates.
- Allocate 27,000 civil service positions to affiliated agencies at the county-level and below. Hiring policies and plans will continue to prioritize the selection of frontline grassroots workers and fresh university graduates.
- Reserve more than 3,000 civil service positions for those previously in grassroots positions and retired soldiers with more than five years of military service after graduating from college.
- New recruits from the national civil service examination were mainly assigned to the taxation, customs, railway public security, and immigration inspection systems. Of the 24,008 total recruits, 10,063 (60.69 percent) were assigned to the taxation system.
3. The Xiamen public security system noted in a recent recruitment announcement that it had hired more than 750 auxiliary police officers in 2023.
Our take
Xiamen’s implementation of Party and state institutional reforms reveals aspects of a regime in crisis.
1. The Xi leadership introduced a second round of Party and state institutional reforms during the 2023 “Two Sessions.” The reforms were partly aimed at consolidating Xi Jinping’s authority over the regime; we analyzed at the time that the reforms serve to “enhance the CCP’s control over government agencies and better allow Beijing to steer the regime through its many crises, at least in theory.” The streamlining of government staff under the reforms appeared to be an attempt at freeing up financial resources to reallocate to the newly established institutions and strengthen the PRC’s stability maintenance capabilities. As socialist regimes would prefer to expand rather than shrink the government apparatus, the reduction of civil service positions indirectly reflects the tight financial conditions of the CCP authorities and worsening economic conditions in China.
There are recent signs that the CCP authorities’ fiscal problems are worsening. Reuters reported on Jan. 19 that the State Council had instructed 12 heavily indebted local governments to delay or halt construction on state-funded infrastructure projects with less than half the planned investment completed, citing three people familiar with the matter. The infrastructure targeted in the directive includes expressways, airport reconstruction and expansion, and urban rail projects. However, projects approved by the central government or for affordable housing are exempt from delays or halts, according to two sources.
The CCP authorities, however, cannot make fiscal savings by cutting back on civil servant wages, which is an “inflexible” expenditure. Since 2008, the CCP authorities have stopped publicly disclosing how many civil servants it has on the payroll. Publicly available data shows that the CCP authorities had employed nearly 40 million government workers at the time, and some estimates suggest that there are between 60 to 80 million people in the civil service. Given that the average yearly salary of an urban non-private sector employee in 2022 was about 114,029 yuan, the CCP authorities could be spending as much as 6.84 trillion yuan supporting 60 million people, or 33.5 percent of the total national general public budget revenue in 2022 (20.4 trillion yuan).
2. Details from Xiamen’s implementation of institutional reforms and a recent public security recruitment announcement indicate that the local authorities are not weakening but boosting their “stability maintenance” capabilities even as they streamline staffing. Publicly available information also reveals that other cities have been consistently recruiting auxiliary police, community police, and “grid” managers in recent months.
Meanwhile, details of the PRC’s national civil servant recruitment drive for 2024 show that the CCP authorities have beefed up its capabilities to control the movement of people (sending new hires to the customs, railway public security, and immigration inspection systems), which ties to the Beijing’s broader push to strengthen control over society. The recruitment of more than 60 percent of successful civil servant applications to the taxation system indicates that the authorities want to increase tax collection efforts, likely to cover financial shortages.
The CCP’s personnel preferences also hint at a regime in trouble. The national civil servant recruitment effort chose to take in recent college graduates, university graduates from the localities, former soldiers, and grassroots personnel. The CCP authorities likely targeted those groups of people for priority recruitment because they are generally from the younger age groups and are more likely to cause trouble if left unemployed. The authorities are also likely looking to exploit the limited social experiences, impressionability, and poorer socio-economic status of younger people to mold them into becoming obedient wage earners who are dependent on the state and are less likely to challenge the regime.
The CCP’s effort at strengthening social controls instead of relaxing its political command over the economy as it seeks a way out of current crises will likely prove counterproductive in time. Beijing risks falling into a vicious cycle where the economy worsens further as it tightens control over society, and a suffocating society worsens the regime’s economic and political problems.
