Wen Eases Off as China’s Cities Seek to Revive Home Sales

Wen Eases Off as China’s Cities Seek to Revive Property Sales
Traffic moves through the central business district in Beijing, China. Photographer: Nelson Ching/Bloomberg

Liu Xuejun, a building-equipment dealer, couldn’t restock his Shanghai showroom fast enough in 2009 as he sold an excavator every three days. Now he might wait six months between sales.

“Scheduled property construction work just doesn’t kick off,” said Liu, 41, as he stood amid dozens of yellow excavators and wheel loaders in the showroom of Shanghai Wo You Construction Machinery Co. on the eastern outskirts of the city.

Liu’s sales are a casualty of an economic slowdown tied to China’s efforts since 2010 to prevent a housing bubble with curbs on lending and property ownership. Now, outgoing Premier Wen Jiabao is tolerating some piecemeal measures to support the market. They include the introduction in May of home subsidies in the eastern city of Yangzhou, discounts on mortgages for first-home buyers in Beijing, and raising the tax threshold on purchases of some homes in Shanghai.

“The easing is happening now and it’s going to keep happening,” said Michael Klibaner, Shanghai-based head of China research at Jones Lang LaSalle Inc. “If you would try to get prices to drop suddenly, that would be a really scary and dangerous thing for both the economy and Wen’s legacy.”

About 30 Chinese cities have issued “fine-tuning” policies since the second half of 2011, according to Centaline Property Agency Ltd., the nation’s biggest real estate brokerage. China’s home prices fell in a record 54 of 70 cities tracked by the government in May from a year ago as developers cut prices to boost sales, the government said on June 18.

Land sales made up about 26 percent of local government revenue last year and in some cities account for more than half, according to Zurich-based UBS AG.

Buyer Subsidies

While the government has said it won’t waver from its curbs, it’s being more lenient toward attempts by local municipalities to increase property sales. That’s a departure from February, when Wuhu in Anhui province had to reverse measures to kickstart flagging housing sales within a week of announcing them. In October, Foshan in the south quickly backtracked on its own easing steps.

Yangzhou in Jiangsu province will offer new buyers subsidies of as much as 0.6 percent of the value of a home, Xinhua Daily reported in May, citing the local finance bureau.

The central city of Wuhan said in April that it would allow down payments as low as 20 percent for some first-time buyers, using loans from the public housing fund into which they must pay a portion of their income each month to qualify for low-interest mortgages. That was compared with a 30 percent down-payment requirement for first homes nationwide.

Shares Rise

China’s central government may not introduce new measures to curb the nation’s property market as it continues to place its priority on stabilizing the market, 21st Century Business Herald reported today, citing Chen Guoqiang, vice chairman of the China Real Estate Society.

A gauge tracking property shares on the Shanghai Composite Index rose 1.7 percent at the local close, the most in three weeks and the biggest gain among the five industry groups on the benchmark.

Some developers in cities including Nanjing, Shenzhen, Guangzhou and Wuhan have been allowing first-home buyers to delay their down payments to boost sales, the China Business News reported in February.

The Shanghai city government is taxing sales of properties, if they are the only ones owned by a family, for less than 3.3 million yuan ($519,700) at half the standard rate. That’s up from a ceiling of 2.45 million yuan.

New Buyers

Lenders in Beijing are giving first-home buyers mortgages at a 15 percent discount to the 6.8 percent benchmark rate after the central bank reduced borrowing costs, said Wu Hao, a manager at the loan brokerage of Bacic & 5i5j Group, Beijing’s second-biggest real estate broker. In the second half of 2011, they paid 5 percent to 10 percent more than the benchmark, she said.

“The central government certainly doesn’t want the property market to fall sharply as it’s concerned about economic growth,” said Yao Wei, a Hong Kong-based economist at Societe Generale SA. “It is actually tolerating some of the fine-tuning by local governments. We are likely to see more of that.”

Property, construction and related industries increased to account for about 20 percent of China’s gross domestic product on average after 2008, according to estimates from Societe Generale.

Economic Growth

China is targeting a 7.5 percent expansion in gross domestic product this year, down from the 8 percent goal in place since 2005. Credit Suisse Group AG and Deutsche Bank AG last month cut their 2012 economic growth targets for China to below 8 percent. Credit Suisse said the property sector remained the major “swing” factor to its current forecasts.

About 93 percent of construction companies surveyed by Credit Suisse in May said they experienced payment delays from property developers, up from 80 percent six months ago.

“This reflects a deteriorating financial situation for the property industry value chain,” Du Jinsong, a Hong Kong-based property analyst at the Swiss bank, said as he released his twice-yearly survey of China’s construction industry in May.

Anhui Conch Cement Co., China’s biggest maker of the building material, reported a 44 percent slump in first-quarter profit, while Angang Steel Co., a steelmaker based in Anshan in Liaoning province, swung to a first-quarter loss.

Moody’s Investors Service estimates that 29 Chinese developers on its rating list, including Hopson Development Holdings Ltd., Greentown China Holdings Ltd. and Shanghai Zendai Property Ltd., need to repay 159 billion yuan of short-term debt this year, the most in data going back to 2008, according to a May 23 report.

New Construction

China’s new property construction fell 4.3 percent in the first five months from a year ago to 729 million square meters (7.8 billion square feet), according to the statistics bureau. That compared with a 23.8 percent increase in the same period a year ago. Property investment growth from January to May slowed to 18.5 percent compared with a 34.6 percent rise a year ago.

Meanwhile, the government has been accelerating the building of low-cost housing in a year when the ruling Communist Party is preparing for a once-per-decade transition to a younger generation of leaders from Wen, 69, this year.

China plans to begin construction of 7 million social housing units this year after 10 million were started in 2011. It will build 36 million units by 2014, aiming for the homes to comprise 20 percent of the entire residential market.

Relax Curbs

“If the government is confident in achieving the target of social housing, then they should gradually relax the housing curbs,” said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “With the big increase of supply, fine-tuning the housing curbs will quickly boost demand and avoid a big slump for China’s economy.”

Property prices in the world’s second-biggest economy surged 32 percent in the two years after the government’s 2008, 4 trillion yuan stimulus package introduced in the midst of the global financial crisis. To keep housing affordable, the government increased down-payment requirements and mortgage rates for some apartments, and set a limit on the number of homes each family was allowed to buy.

The Housing Ministry said last month it won’t flip-flop on policies, the Shanghai Securities Journal reported, while the State Council, China’s Cabinet, pledged in April to stick with its existing property controls.

Key Policy

“The government may fine-tune a bit, but won’t ease property curbs as home price declines is a key policy objective,” Dariusz Kowalczyk, a Hong Kong-based senior economist and strategist at Credit Agricole CIB, said in an e-mail.

That was evident last week when the central province of Henan denied a 21st Century Business Herald report that the local government had asked banks to offer discounts of as much as 30 percent on mortgages for first-home buyers. The province had canceled a plan to introduce the measure, the newspaper said.

The People’s Bank of China cut the benchmark one-year lending rate to 6.31 percent from 6.56 percent on June 7, accelerating efforts to combat a deepening slowdown. It was the first rate reduction since 2008.

That is not enough to revive the housing market, said Shen Jianguang, an economist at Mizuho Securities Asia Ltd.

“More decisive easing of the property measures is needed, otherwise it will have a huge impact on China’s economy,” said Hong Kong-based Shen. “Easing of monetary policy is not enough because it’s still difficult for developers or local government’s financial vehicles to borrow from banks.”

Price Rebound

Still, home prices in June rose for the first time in 10 months, according to a survey of 100 cities by SouFun Holdings Ltd., the nation’s biggest real estate website owner.

The nation’s home sales rebounded for the first time this year in May, rising 19 percent to 375.7 billion yuan from the previous month, according to the statistics bureau. Evergrande Real Estate Group Ltd., the country’s biggest developer by sales volume, posted a 33 percent rise in sales to a record 10.4 billion yuan in May from a year earlier.

The housing curbs will remain “tight” this year, preventing transactions and prices from rebounding significantly, Freddy Lee, chief executive officer of Shanghai-based Shui On Land Ltd., said last week in an interview.

For Liu, who has been selling construction machinery for a decade, is grappling with two of his clients who placed deposits for excavators several months ago and have delayed the full payment as they push back housing projects in Shanghai’s Chongming Island, he said.

“I can’t do much about it,” he said. “I just have to seek out more non-property-related clients.”

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