China's Property Market Gets a Boost from Developer Incentives

China has unveiled a new package of measures to revive its struggling housing market, in the most significant policy shift since the country began tightening credit conditions two years ago. The new measures include tax breaks and subsidies for home buyers, as well as increased funding for housing construction.

The Chinese government has rolled back some of its previous rules aimed at reducing debt in the property sector. In 2020, the government introduced a policy called “three red lines” that limited developers’ abilities to raise financing unless their debt ratios were below specific thresholds. The government had also pushed banks to lower the percentage of their loans to the property sector.

The most recent easing of restrictions has not undone the policies completely, but it has given developers and lenders more flexibility, such as extending the repayment period and allowing banks more time to reduce their property loans.

Beijing has so far focused on ensuring that apartments already paid for by anxious homeowners are delivered, but developers' financial difficulties have complicated those efforts. The latest moves are designed to ease strains on developers directly.

The stocks and bonds of Chinese property developers soared on the news: Shares of Country Garden jumped 46% Monday while those of Longfor surged 16% in Hong Kong trading. Those private developers are considered to be beacons of strength in the struggling sector, but even they have been dragged into potential liquidity problems from the reeling housing market. Some of the most indebted companies in the sector, such as Evergrande, have already defaulted on their bonds and had their shares halted for trading.

The latest measures will likely prevent private developers from collapsing. The policy documents stressed that lenders should treat state-owned developers and private ones the same.

It will be trickier to spur the recovery of the housing market. Unlike stocks and bonds in the U.S., residential real estate is Chinese households’ main form of investment.

Home buyers have stayed away as they are worried whether the developers will be able to deliver apartments, which are typically prepaid. China’s economic slowdown and zero-Covid policies have also reduced prospective homeowners’ buying power. Beijing started easing some of its strict pandemic restrictions, but full reopening may still take months. Home buyers might no longer treat properties as a one-way bet—which helped fuel the now-collapsing bubble—as before.

Nomura economists said in a note Monday that even after a recovery, new home sales could settle at a significantly lower level than before the pandemic.

Beijing's latest move to tighten lending standards could help stem systemic risks and prevent some of the worst outcomes of a potential contagion. Whether it will revive confidence in what was the world's largest, and one of its frothiest, property markets is more uncertain.