China Pledges More Controversial Stimulus to Shore Up Real Estate Industry

By Franco Faraudo

We have all been witnessing one of the largest real estate crashes in history. China is the world’s second-largest economy, and it is one of the most reliant on the property industry, which contributes around 30 percent of the country’s GDP. The world was first turned on to the crash last year when developer Evergrande went bankrupt. Since then, we have seen larger and larger property companies either run into financial trouble or go under altogether.

The fear of a larger real estate collapse that would strain China’s entire financial system has brought stock prices down and made it even harder for real estate firms to stop the bleeding. Investors feared that the Chinese government would not save these troubled companies since they had made statements about how they are more worried about protecting consumers and homeowners than speculators. But finally, the Chinese authorities have announced that they are at least considering a $137 billion stimulus into a program they call Pledged Supplemental Lending.

The Pledged Supplemental Lending or PSL program has been around since 2014. It was created as a way to spur urban renewal by providing secured, low-interest loans to companies redeveloping the country’s “shantywons.” The thought is that this approach would shore up many of the country’s largest property companies, which are mostly very heavy on development, without fueling inflation or weakening the currency.

A loan program like the PSL does have some negative side effects, though. Remember that undeveloped land in China is bought from the local government, so certain cities are incentivized to develop or, as is the case in many areas already, overdevelop. PSLs are also a way for the Chinese government to pay back residents whose homes are demolished to make way for these urban renewal projects by giving them part of these cash subsidies. This can also create the type of speculation that caused so many households in China to prepay for units still under construction, one of the main reasons why so much of the country’s wealth is tied up in real estate.

China has now signaled that they will, in fact, step in to save their property industry. They are doing so in their own way, one that prioritizes residents over the companies themselves. But their methods have a way of perverting market forces in a way that creates the bubbles that have caused so many problems in the first place. We might look back on this stimulus as a great way for China to shore up its property industry for long enough for the market to come back or, if things don’t go well, we might look at it as the time with China just blew more air into their property bubble.

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