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Property sector expected to play healthier role in China's economy

Bruce Pang

Editor's note: Bruce Pang is the chief economist and head of research at JLL Greater China. The article reflects the author's opinions and not necessarily the views of CGTN.

On February 20, China announced its biggest-ever reduction in the over-five-year loan prime rate (LPR) – a reference rate predominantly used for benchmarking the pricing of mortgages – of 25 basis points. The latest move does not imply that a more reflationary monetary policy is on the way, but a moderate policy stance with flexibility and targeted support for China's real estate market and the broader economy.

The People's Bank of China may think that broad-based rate cuts are not necessary at this stage, but policymakers are showing their determination to support the property sector. Coupled with the optimization and adjustment of housing-market measures, trimming the over-five-year LPR will help stabilize confidence, promote investment and consumption, and pave the way for a longer-term recovery of property sales and investment.

China's property sector is still facing some difficulties and challenges. Policy support from sales to investment, and from demand to supply, is needed. This is largely because the once-strong growth engine for China's economy is now experiencing a mix of near-term cyclical disruptions, medium-term structural issues and longer-term mega trends.

To revive the economy, especially the property sector, efforts on all fronts would be needed. Monetary policy alone will not and cannot lead to a full revival in home sales, considering that mortgage rates have already fallen by close to 200 basis points since late 2021. However, coupled with efforts to provide increased credit support to developers, the latest LPR cut that focuses on boosting home demand should help ease the burden on homebuyers and reduce pressure on developer cash flow.

In the past several quarters, an array of property-easing measures and housing-friendly moves have been rolled out. The latest mortgage reference rate cut represents targeted easing and support in order to prop up demand in the housing market. There have also been efforts to ease financing strains among developers and inject liquidity into qualified property firms, including but not limited to the latest launch of a whitelist mechanism of loans for developers and property projects eligible for funding. All cities are also urged to make timely efforts to establish a coordinated mechanism for financing the property industry and make sure it operates with high efficiency.

Policymakers are sending a clear message that they are prepared to provide more policy help and financial support to both homebuyers and developers, which could stabilize and restore sentiment, confidence and interest in the property sector. This will help lay a healthier foundation for the sector, with a more sustainable growth pattern and development model going forward.

On the demand side, the central and local governments are expected to continue to optimize and adjust policy measures in order to promote the stabilization of the real estate market and to better meet the reasonable home demand of residents. In particular, higher-tier cities' existing curbing measures – such as restrictions on purchase, sales, price and mortgages – are expected to relax gradually, together with the adjustment of transaction tax and fee exemption periods and reduction of down-payment ratios and mortgage interest rates, among others. Differentiated policies will continue to be implemented accurately according to local conditions, better meeting the "rigid demand" for housing and improvement of housing for residents.

On the supply side, reasonable financing demand of various types for real estate enterprises with different ownerships will be met with timely support on a level playing field. Stronger support will be primarily given to qualified property firms that focus on their major businesses, comply with laws and regulations, have a good market reputation, growth potential and systemic importance. Supportive measures should also aim to help these firms reduce their financing costs, expand their funding channels, fine-tune their existing credit and enhance the efficiency of fund utilization. These firms' cash flow, investment activities, and mergers and acquisitions, are expected to be brought back to normal, together with timely delivery of unfinished projects as well as orderly and accelerated "cleanups" of distressed developers. While relief could be provided to some indebted firms, the support is likely to be modest, disciplined and sustainable.

The property industry remains a "pillar" of China's economy. In 2024, the journey towards the full recovery of China's property sector could still be a long and bumpy one. The buying sentiment, home prices and property sales are expected to see some signals of stabilization, while property investment could see a higher probability of marginal narrowing of its decline. Policies could be eased further until the market shows signs of stabilization and recovery. The specific stimulus package for potential pickup of investment in affordable housing programs, and urban-village renovation and redevelopment, could also help to buffer the volatility of property investment and to inject new driving forces into the property sector.

The property sector is neither an expensive catalyst of nor a major drag on China's economy. In the longer term, the government will further promote the stable growth and sustainable development of the property industry to align with the country's new growth model and break away from the old one that relies heavily on investment. These are also positive catalysts for the recovery and long-term development of commercial properties such as offices, shopping malls, multifamily, and industrial properties such as business parks and logistic facilities. All in all, the property sector is expected to have a smaller, yet more sustainable and healthier role in the economy.

(Cover via CFP)

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