Shares of Chinese property developers surged after reports suggested China might allow local governments to purchase unsold homes from distressed developers to ease the property crisis. The Hang Seng Mainland Properties Index rose 4.9%, with significant gains for companies like Fantasia and KWG Group. The State Council's plan involves state-owned enterprises buying homes at discounts to convert them into affordable housing. Despite optimism, concerns about the plan's feasibility in lower-tier cities and the financial health of local governments persist, given their $9 trillion debt.
Shares of Chinese property developers surged after a report indicated that China might be considering a plan for local governments to purchase millions of unsold homes from distressed companies to alleviate a prolonged property crisis.
The Hang Seng Mainland Properties Index in Hong Kong rose 4.9%, reaching its highest level since November 24. This sub-index has increased by around 30% since mid-April, when speculations began about more supportive measures for the struggling sector after months of disappointing home sales.
Among the biggest gainers were private developer Fantasia, which jumped 63%, KWG Group, which rose 40%, and state-backed Sino-Ocean Group, which surged 46%. Hong Kong's markets had been closed on Wednesday for a public holiday, so Thursday's rally was catching up to the gains in mainland property shares from the previous day.
China's CSI 300 Real Estate index also saw a boost, firming 3.5% on Thursday following a 2.2% rise on Wednesday.
According to Bloomberg News, the State Council has gathered feedback on a preliminary plan from various provinces and government bodies. This plan, following a meeting of Communist Party leaders in late April, aims to clear the growing inventory of unsold homes. The report suggested that local state-owned enterprises would be encouraged to buy unsold homes from distressed developers at significant discounts, using loans provided by state banks. Many of these homes would be converted into affordable housing.
A meeting is reportedly scheduled with key officials from the housing ministry, financial regulators, local governments, and state banks to discuss the property market and proposals to clear excess housing inventory. However, Reuters could not independently verify these reports.
China's property sector entered a debt crisis in mid-2021. Since 2022, various policy measures have failed to stabilise the industry, which accounts for about one-fifth of the economy and continues to be a significant drag on consumer spending and confidence.
In recent years, some local governments have announced plans to buy unfinished or unsold homes from developers and convert them into social housing, though these efforts have been on a small scale. Recently, authorities have increased policies aimed at reducing the stock of unsold housing. Major cities like Beijing and Shenzhen have eased home purchase restrictions, with some allowing homebuyers to "swap" an old home for a new one.
JPMorgan suggested that the proposed plan could stabilise property sales, preventing them from worsening. However, the bank expressed scepticism about the plan's effectiveness unless significant funding comes from the central government. Nomura added that if local governments could purchase a substantial volume of unsold homes from developers, it could help resolve the inventory issue and channel funds to financially strained private companies. This, in turn, would support construction activities and mitigate the sector's downward trend.
Despite these optimistic views, concerns remain about the lack of housing demand in smaller cities. Analysts worry that such a plan could strain the financial health of local governments, which are already burdened with more than USD 9 trillion in debt, posing a major risk to China's economy and financial stability.
Goldman Sachs estimated this week that saleable housing inventory was valued at 13.5 trillion yuan at the end of 2023. Completing the construction of these homes would require an additional 5 trillion yuan of capital investment.
In summary, while the potential plan for local governments to purchase unsold homes from distressed developers has sparked optimism in the market, significant challenges remain. The success of such a plan depends on its scale, implementation, and ability to stimulate demand, particularly in lower-tier cities. As China navigates its property sector's complex issues, the financial stability of local governments and the broader economic impact will be closely watched.
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