A 180-Degree Turn for Xi Jinping – China Is Making It Easier Again to Lend to Property Developers.
The CCP wants to solve the real estate crisis and stop the people's protest that is starting to rise.
The health of China's massive real estate sector remains a big concern in China, but also around the world. While Evergrande, the country's largest developer, is still struggling with mountains of debt and is looking elsewhere for new funding, the overall slowdown in the sector is undermining the revenue that the Chinese government hopes to collect through taxes, while contributing to the threat of recession. While it had tightened the screws in 2020, it is finally easing off in the name of domestic stability.
In this context, the Chinese government is doing what it can to breathe some air into the buoy that is still keeping the real estate sector afloat. In May 2022, the country's central bank lowered the key interest rate on five-year loans for the second time in a row to allow developers to raise fresh money.
Stimulate demand and finish building supply
This week, in a related development, China's banking regulator pledged to boost its loan supply to help developers complete pending real estate projects and stimulate buyer demand.
The China Banking and Insurance Regulatory Commission (CBIRC) reaffirmed in late July 2022 that it would provide “active credit support” to real estate developers so that they can complete delayed or stalled projects as soon as possible. It also urged banks to provide more mortgages to buyers to support demand and boost the market.
According to China's banking regulator, the previous measures are starting to bear fruit: “The current pace of property-related lending has reached the fastest pace since 2019,” said Liu Zhongrui, an official at the CBIRC. In June 2022, new loans to developers issued by banks also reached 52.2 billion yuan ($7.7 billion), Liu added.
CCP makes a 180-degree turn
We can talk about backpedaling, because at the origin of the crisis, in 2020, China had precisely cracked down on the massive recourse to loans that its major property developers, Evergrande in particular, were practicing. It is the lack of liquidity of the developers that had encouraged them to resort massively to borrowing, and which then decided the Chinese government to crack down, to contain their debt and curb the rise in property prices.
But this measure has had the consequence of confronting developers with their huge debts without the possibility of repaying them by resorting to borrowing, forcing them to massively stop their ongoing construction projects, to the great displeasure of Chinese citizens waiting for their housing. This has led to the beginnings of unprecedented social discontent in the country.
A situation that seems to have convinced the Single Party to reverse its previous tightening of the screws.
The bottomless treasury (with no financial funds) of Evergrande
But that doesn't mean that this potential real estate crisis has been fully resolved in China. Again, it is the giant Evergrande that is in the news, as the company recently said its chief executive and chief financial officer resigned after a preliminary investigation revealed their involvement in the detour of loans secured by its listed unit to the group.
According to CNBC, these pledge-backed loans, amounting to 13.4 billion yuan ($1.99 billion) “were transferred and diverted to the group through third parties and were used for the group's general operations.”
This kind of revelation on the behavior of its financial elites is not a good sign for the Chinese government, while the real estate scandals are stirring up unprecedented anger within the society that does not seem to subside, even if it has been discreet until now.
Because if China wants to support its real estate sector by facilitating loans again, these measures are also designed to offer better access to funds to Chinese citizens ready to invest in bricks and mortar, and thus flatter a growing middle class, whose support to the regime is crucial for the stability of the country.
The CCP is therefore faced with a difficult equation to solve.
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