Kevin Yao

BEIJING (Reuters) – Chinese leaders, fearful that a persistent property bubble could undermine the country’s long-term ascent, are likely to maintain tough curbs on the sector even as the economy slows, but could soften some tactics as needed, policy sources and analysts said.

President Xi Jinping seems determined to continue with the current round of property tightening despite its immediate pain. In contrast to past campaigns that were diluted as economic growth declined, they noted.

Xi’s resolve stems from a longer-term structural push to reduce the economy’s reliance on property and debt and channel more resources into high-tech manufacturing and other emerging sectors to drive growth.

Despite the rapid growth of many other industries over recent years,

the property sector, along with related sectors such as construction, still accounts for more than a quarter of China’s gross domestic product (GDP).

Although Japan is the second-largest country in the world, it has shown a remarkable recovery after the pandemic. However there are some signs that this recovery is slowing. The pressure of property restrictions and supply chain disruptions as well as weak consumer spending are increasing the power scarcity.

The global concern about the potential spillover credit risk from China’s property sector to the wider economy has intensified, as China Evergrande Group, China’s largest developer, is saddled with over $300 billion in debt.

Liu He, Xi’s top economic aide, has repeatedly warned against financial risks, while Guo Shuqing, head of the banking regulator and party chief of the People’s Bank of China (PBOC), has said property is the country’s biggest “grey rhino”.

Grey rhino is an indication of a significant, obvious threat. It is usually ignored until too late.

A source involved in discussions on internal policies said that property curbs would be difficult but necessary.

“In the past economic downturns led to us loosening controls, but the current leadership seems determined.”

Reuters did not receive any comment from the State Council Information Office or the PBOC.

RED LINES IN SAND

Analysts stated that, despite many campaigns to lower property prices in China, the cost of housing has risen to an alarming level. This hinders Beijing’s efforts at increasing birth rates, as well as addressing the slowing population growth and rapid ageing.

Officials increased property controls in August 2020. In this month, the PBOC implemented new measures that closely monitored and controlled the developer’s debt. These included “three red lines” designed to reduce developers’ borrowing and limit debt risk.

However, policy errors would come at a high price due to the importance of the sector as a source of revenue for local governments and the risks of social instability in the event that home prices plummet rapidly. Many Chinese people have not seen a prolonged property slump.

Stability in the property industry should be our top priority. Zong Liang (chief researcher, Bank of China), stated that he doesn’t want property prices to rise rapidly and that he does not want many developers to go bankrupt.

MARGINAL CHANGES ARE AVAILABLE?

Analysts and insiders said that while the PBOC will likely continue to press developers to lower their debts and improve their balance sheets by putting pressure, it may make some minor policy adjustments to address excessive credit tightening from some lenders.

The PBOC declared last month that they would defend the legitimate rights and interests homebuyers as Evergande’s financial crisis worsened.

Lian Ping of Zhixin Investment, chief economist said that while the “three red lines” are not likely to be changed, it is possible for the rules to be implemented a bit looser.

He stated that while the standard for property loans will not be relaxed, it could see an increase in their scale.

Analysts suggested that banks could have more flexibility to lend money to real homebuyers than to speculators. Additionally, developers who are healthier could receive more support.

Ting Lu, Nomura’s chief China economist, stated in a note that Beijing will likely increase fiscal and monetary ease measures amid the slowdown. However, Beijing will continue to tighten its stance on property and high-carbon emissions sectors.

Lu stated that some local governments might introduce minor easements, which would focus on lifting restrictions or adding subsidies.

The PBOC has been channeling credit more into the manufacturing industry in the last months at the expense to the property sector.

Outstanding medium- and long-term loans for the manufacturing sector rose 41.6% year-on-year in June, quickening from a 24.7% rise a year earlier, while growth of outstanding loans for the property sector slowed to 9.5% in June from 13.1% a year earlier, central bank data showed.