Stock investors have been cheered by the long-hoped-for rally of Chinese property shares so far this month but analysts warn that the surge cannot be sustained over the medium term.
Reason: The scale of the home purchase scheme unveiled by the People’s Bank of China (PBoC) is too small and will not be enough to reverse the declining trend of the property markets.
Analysts say property developers’ profitability will not improve in the coming six months and those companies’ shares will be under pressure again. They say they are also bearish on other stocks, as weak domestic consumption remains the biggest problem for the Chinese economy.
Asia Times interviewed Arthur Budaghyan, chief emerging markets and China strategist of BCA Research, a Canada-based investment research company, to get his take.
”Four to six months from now, Chinese property stocks will probably be lower than today’s level,” Budaghyan said. “In the short term, stock markets can be irrationally driven by some wrong kinds of perceptions, but over the medium term fundamentals will prevail.”
He said the Chinese government has been stimulating the property markets and economy for two and a half years but the effort has not succeeded. For example, he said, the government decided in late 2022 to provide 1.88 trillion yuan (US$259 billion) funding to property developers to complete unfinished apartments but the move failed to boost property prices and sales.
He said the funding for local governments to purchase unsold homes from the markets is too small when compared with property developers’ total sales in 2023.
Outstanding housing stock
The PBoC said on May 17 that it will establish a nationwide program to unleash 300 billion yuan in cheap funding to help state-owned-enterprises (SOEs) buy unsold homes in a bid to reduce property inventory in the markets.
The central bank will offer loans to national banks to cover 60% of their lending in the scheme, meaning that the banks will have to lend another 200 billion yuan to SOEs, bringing the total up to 500 billion yuan.
However, the amount is only equivalent to 4.3% of China’s property sales figure, which was about 11.66 trillion yuan in 2023.
“Will the new funding be enough to return the property market to its glory days? Almost certainly not,” Harry Murphy Cruise, an economist at Moody’s Analytics, says in a research note. “The 300 billion yuan funding is a drop in the ocean given the scale of unsold stock.”
He said estimates suggested that the value of outstanding housing stock in China has jumped by more than 7.5 trillion yuan since 2018. He said the new package provides funding for only 4% of that.
He added that, instead of shooting for a return to the glory day, Chinese officials seem to have aimed only to slow the property sector’s fall and bide time until it naturally finds a floor.
Shares of many Chinese property developers have already more than doubled this month. On Wednesday, Shimao Group rose 5% while China Vanke increased 4%.
Low fertility rate
Analysts said Beijing wants to stabilize the property markets but at the same time avoid high home prices, which reduce young couples’ incentive to have children.
In January, the NBS said China’s population amounted to 1.409 billion at the end of last year, down 2.08 million people from a year earlier.
That was the second year in a row for China to recorded contraction in population, after the figure dropped by 850,000 in 2022 from 2021.
“China’s fertility rate is one of the lowest in the world, even lower than that of Japan and Italy,” Budaghyan told Asia Times. “Young people say houses are too expensive. If the government inflates house prices now, the demographic situation will get worse.”
He said the Chinese government wants to bring down home prices so a couple can afford to buy a nicer apartment and have one or two children.
“The Chinese government has a much longer time perspective and wants to focus on demographics, instead of boosting property prices. That’s why it has not been very aggressive in stimulating prices,” he said.
One way to quickly push up property prices is to cancel home purchase limits in first-tier cities such as Beijing and Shanghai but it’s unlikely that the central government will do it, according to some property experts.
Dispute settlement
Victor Ng Ming-tak, a former banker and academic in Hong Kong, says on his YouTube channel that the recent rise of Chinese property stocks will not last long as the government’s stimuli will not help improve property developers’ profitability.
He observes that the PBoC’s home purchase scheme seems to be a financial settlement package that is aimed at resolving disputes between homebuyers and property developers.
“Three years ago, millions of people had threatened to stop repaying their mortgage loans as property developers failed to deliver apartments. So Beijing agreed to provide property developers loans to finish their work,” he says. “But now, these homebuyers refuse to receive their properties as their value has decreased by 30%.”
He says, under the home purchase scheme, these homebuyers can now become tenants of the properties and avoid an immediate 30% loss in property value while their rents will be collected by local governments to repay bank loans.
“Such a deal will not allow property developers to make profits,” he says. “How come their shares are surging now?” He warns that stock investors should prepare to realize their gains in this rally at some point.
“We expect China’s latest support measures to help alleviate some short-term pressures in the housing market, helping to smooth the sector’s deleveraging and reduce systemic risks,” Kelly Chen, a vice president and senior analyst at Moody’s Ratings, says in a research note. “Still, looser mortgage policies are unlikely to spark a notable and sustained improvement in contracted sales for new homes.”
She says the home purchase scheme will increase the contingent liabilities of some local governments because local state-owned enterprises participating in it could raise debt to acquire unsold inventory from property developers.
No helicopter money
In March, Budaghyan published a research report titled “No Game Changer” after the Chinese government announced a 5% GDP growth target for 2024 during the annual meeting of the National People’s Congress.
He said it will be very challenging for China to achieve its 5% growth target, unless there are some big stimuli.
He told Asia Times that he still maintains his view that the Chinese government’s spendings in 2024 will fall short of the budgeted amount due to a decline in land sales revenues.
”It’s easy to use helicopter money to stimulate the economy but I don’t think the Chinese government has that mentality,” he said. “If things get really bad, it will do it.”
He said Beijing also wants to avoid quantitative easing, which would add pressure to the Chinese currency.
Read: China unveils property stimuli amid falling sales
Follow Jeff Pao on X: @jeffpao3