Massive stimulus to revive China’s ailing property market is a fool’s hope

There are good reasons to believe a far more restrained approach will prevail as Chinese policymakers try to revive a flagging economic recovery
Even if the government provides meaningful support, the overriding priority is to stabilise the market as opposed to stimulating it too much

Nicholas Spiro

Published: 3:45pm, 17 Jul 2023

Why you can trust SCMP

It is a testament to how bleak market sentiment towards China is that “double dip” has become one of the most frequently used terms to describe the performance of the economy, just seven months after Beijing scrapped its “zero-Covid” policy, putting an end to three years of self-imposed isolation.

Nomura began using the phrase last month in response to the sharp deterioration in economic activity in the second quarter of this year. The bank estimates that China’s economy barely expanded compared with the first quarter, when it grew 2.2 per cent. One of the reasons Nomura is bearish on the outlook for growth is that it does not anticipate “bazooka-like” stimulus measures.

The unexpectedly rapid reopening of China’s economy shows that Beijing still has the capacity to stun markets in a positive way. However, when it comes to the ailing property sector, there are good reasons to believe that a far more restrained approach will prevail.

In a report published on June 16, Nomura said “markets should curb their expectations for a fast, cure-all package” of stimulus measures to revive the depressed housing market.

Given that investors have been repeatedly disappointed by Beijing’s confusing policy response, it is unlikely that expectations are high. This does not mean, however, that Beijing is free from pressure to take more decisive and forceful steps to restore confidence in the depressed housing market, particularly since the sector is the main culprit for the much weaker-than-expected economic recovery.

There were tentative signs earlier this year that the severe strains on China’s real estate market were easing. Sales and prices began to recover while a partial loosening of curbs on borrowing by cash-strapped developers alleviated the liquidity crisis, but those quickly gave way to a renewed deterioration in the fundamentals of the industry.

10:57

Boom, bust and borrow: Has China’s housing market tanked?

Last month, new home sales by the 100 largest developers plunged at an annualised rate of 28.1 per cent, compared with a rise of 6.7 per cent in May. Moreover, new home prices in 70 cities in May rose at their slowest pace in four months while values in the secondary market contracted. Just as worryingly, stresses in China’s offshore and onshore credit markets are intensifying again amid a renewed increase in developer bond defaults.

In a report published on May 22, S&P Global Ratings predicted sales this year would be more than 30 per cent below their peak level in 2021. Furthermore, it noted that the the property crisis has “entered a new leg”, with sales in upper-tier cities stabilising and transactions in woefully oversupplied lower-tier cities falling sharply.

Ominously, S&P warned that the downturn in third- and fourth-tier cities would “hit a large section of the industry”. If sales in lower-tier cities were to drop 20 to 30 per cent this year, 40 to 60 per cent of rated developers could experience pressure on their ratings. According to S&P, one in four developers are already “brushing against insolvency”.

Last week, Beijing extended some of the debt relief measures designed to help developers deliver homes that are under construction. This suggests a further loosening of restrictions – lowering down-payment ratios for first-time buyers and an easing of curbs on home purchases in districts outside city centres in second-tier cities are possible – is in the offing.

Will Hong Kong developers’ bets on Greater Bay Area backfire?

Yet, even if the government provides more meaningful support for the housing market, easing measures will remain incremental and conditional. The overriding priority is to stabilise the market as opposed to stimulating it too much. As UBS noted, the focus is on “limiting the downside – more antidepressant than stimulus”.

The absence of large-scale stimulus stems from several factors. First, tensions between the urgent need to reform an overbuilt and overleveraged property industry and the imperative of maintaining financial and social stability have become more acute since the Covid-19 pandemic exacerbated the slowdown in growth.

Jim Veneau, head of fixed income, Asia, at AXA Investment Managers, said intense policy debates over how to respond to the downturn, in a sector that is crying out for reform yet remains a pillar of the economy, work against the implementation of a massive stimulus programme. “If there is common ground, it is to not allow the problems [in the industry] to get even worse,” Veneau said.

Second, China is not as financially stable as it was in 2008, when it could afford to spend its way out of trouble. China’s total debt-to-gross domestic product ratio hit a record high of nearly 280 per cent in the first quarter of this year, nearly twice the level in 2008, according to Bloomberg data.

Diminishing returns of investment-led growth, coupled with concerns about Chinese consumers’ willingness and ability to spend, cast doubt on the efficacy of more stimulus.

People walk past a billboard at an upscale shopping mall in Beijing on June 13. A recent study found Chinese consumers remaining cautious on loosening their purse strings, with many inclined to hunt for bargains amid a gloomy economic outlook. Photo: AP

Third, the sudden unleashing of a huge stimulus package would run counter to policymakers’ emphasis on stability, steady growth and the need to be patient in allowing the recovery to take hold.

While this could be viewed as procrastination, a massive stimulus programme could backfire if it is taken as a sign that Beijing is more worried about the housing market than previously assumed. “It could be perceived as an act of desperation as opposed to restoring confidence,” Veneau said.

Most investors still want Beijing to err on the side of doing too much rather than too little. Yet, the reopening rally lasted only three months. A stimulus-fuelled surge in property stocks and bonds could be even briefer if a durable recovery in sales and prices fails to materialise.

Nicholas Spiro is a partner at Lauressa Advisory