China's Property Measures: A Step in the Right Direction, but Are They Enough?

China's recent property measures introduced on May 17, 2024 represent a significant policy shift aimed at addressing the persistent challenges in its real estate sector. The measures come on the heels of the recent Politburo meeting in April, which shows that the Government is finally recognizing that stabilizing the property market should be a top priority.

We’ve highlighted in the past that a major issue with the consumer not spending continues to be the property market. For the longest time, the Chinese government discouraged speculation in property purchases, emphasizing that “homes are for living”. That trend has continued and people are worried about sinking their money into property where the handover of property under construction has been sketchy. Home prices have been spiraling downward since 2019.

As property sales slowed down, property developers found their cash flows drying up and were not able to complete properties under construction. This is part of the “off-plan” property game, and when the music stops, the whole thing crumbles.

The pandemic certainly brought that on. And now, the situation is such that property developers are stuck, and are claiming bankruptcy. People are stuck because they have money locked in these unfinished properties.

And then there is the issue of the local government debt. The Local Government Funding Vehicles (LGFV) continue to see their debt burden increase with interest payments. Unfortunately, it’s getting to a level where servicing this interest or refinancing this debt is a challenge. The local government generates cash flows by selling land to property developers, who have now stopped buying.

So you can see how all this amounts to a vicious cycle. Therefore, the measures discussed last week were a significantly important step in the right direction. However, the question now remains… are they enough?

What we cover

• Measures Introduced

• Why These Measures Are Not Enough

• Closing Thoughts

• Our View on Equities

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