Easing property policies can support economic recovery
Published: May 21, 2022 10:59 AM
Illustration: Chen Xia/Global Times
Illustration: Chen Xia/Global Times

Burdened by a resurgence of coronavirus in Shanghai, Beijing and a few other large cities, China's economy in April reversed its growth trend and slowed down as stricter pandemic control measures, such as the lockdown in Shanghai, seriously battering economic activities. To upend the downward trend of the economy, the government is taking action.

Last week, China's central bank, twice announced significant financial policy easing - cutting the housing mortgage rates tied to benchmark loan prime rate (LPR) by a total of 35 basis points for loans of five years or longer.

The policy easing of this magnitude is specially targeted at rejuvenating China's urban real estate sector in the hope of triggering a wave of new home sales, in an attempt to inspire fervent housing consumption across the country.

Under the new banking policy, Chinese residents who want to buy their first homes will be able to borrow money from banks and other financial organizations at an interest rate much lower than previous months, say April. As the majority of housing mortgages are lasting longer than five years and are pegged to the five-year loan prime rate (LPR) which was 4.6 percent in April, the new mortgage rate could be as low as 4.25 percent now.

The substantive reduction of mortgage rates has apparently sent a clear and loud signal that Chinese policymakers will not tolerate a free fall of the economy and are pushing for effective policy easing to refuel the property sector - a pivotal industry that has accounted for approximately 20 percent of China's annual GDP in the past five years.

In addition, purchasing a new home will immediately rev up consumption of furniture, kitchen ware, household electric appliances and a broad variety of construction materials such as steel, cement, timber, glass, paint and more - what economists define as "sync consumption" to be caused by property sales. Because of the pandemic-induced lockdowns and stiff prevention restriction measures, the country's domestic consumption dropped more than 11 percent in April year-on-year, dragging down the month's economic growth significantly, as consumption is the major driver of the economy.

In announcing the reduction of mortgage rates, the central bank stated that the policy change is aimed at "bolstering housing demand and will help promote the stable and healthy development of the property market". The decision to cut rates comes after a big plunge in mortgage lending in April, with data released last week showing a 60.5 billion ($8.95 billion) contraction in new mortgages, or dropping 29.5 percent year-on-year.

Immediately following the central bank's policy easing, lenders in major Chinese cities, like Suzhou and Nanjing in Jiangsu Province, Dalian and Shenyang in Liaoning Province, Tianjin city in North China, and Guangzhou and Shenzhen in southern Guangdong Province have already moved to cut mortgage rate to as low as 4.25 percent for loans of five years and longer. Young people preparing to get married or families wanting to change for a bigger apartment are enthusiastic about the mortgage rates reduction, and actively applying for bank loans.

And, China could do even more. The central authorities in Beijing ought to encourage local governments to boost demand for homes by loosening regulations and strict administrative controls on property in cities and provinces across the country. For instance, all the provincial capitals and the so-called second- and third-tier cities should churn out more favorable policies and incentivize new home buyers. Some tier-two and tier-three cities are beginning to allow residents to buy second and even third apartments.

The country's real estate market, a crucial source of economic growth, has been in a slump for the past 12 months, with sales decreasing at a double-digit pace every month since August 2021, and prices of new homes keeping dropping following a government orchestrated squeeze on indebted property developers - for the purpose of bringing down their leverage ratio and reducing a potential big risk in the financial system.

Now, some good news are coming in, as Shanghai has announced that it has started reopening from a six-week lockdown which has inhibited economic activity and pummeled industrial production in one of China's most economically important cities. Other large cities like Shenzhen, Guangzhou, Changchun and Xi'an have largely recovered normalcy in business operation and social life, after controlling local resurgences of the coronavirus and achieving the "dynamic COVID-zero" target.

Led by an expected property sales boost across Chinese cities, plus their routine prudence and vigilance against the virus, China's economy will gradually regain its momentum of growth, as the resilience, potential and space of the economy have been tested, time and again, during the 2003 SARS assault, 2008-09 global financial crisis, and the first wave of COVID-19 onslaught in 2020.

The global variations concerning the Ukraine crisis and many other factors, typically the surging inflation in the US, Europe and elsewhere, has exceeded the policymakers' expectations. Undoubtedly, there is great difficulty facing China to achieve the targeted 5.5 percent economic growth planned for 2022.

But pessimism is unwarranted as China is always good at braving the headwinds and getting the job done. The government's enhanced investment on infrastructure and the restarted real estate industry, together with robust exports, will likely lead to a fast comeback of dynamic development again.

The author is an editor with the Global Times.