Housing market Photo:VCG

The city of Zhengzhou, of Central China's Henan Province, has announced a real estate fund worth up to 10 billion yuan ($1.47 billion) to leverage social funds and default mortgage risks. This is the first Chinese city to implement a regional real estate fund after a number of Chinese homebuyers decided to suspend loan repayments for unfinished projects since July, chinatimes reported on Sunday.

According to the plan, the real estate fund of Zhengzhou will be set up and operated under the guide of the government and will follow the market oriented operations.

The source of the funds will contain two parts. The Zhengzhou National Central City Fund which operated by the Zhengzhou finance bureau will set up a bailout fund with the scale of 10 billion yuan as a parent fund. 

A sub-fund will be set up with 30 percent originating from the parent fund and 70 percent of the fund being raised from city and district level state-owned companies and social capital including construction enterprises, asset management companies and financial institutions, according to the plan.

The bailout fund together with the social capital should revitalize one or two existing projects with high net worth from distressed real estate companies and urge these companies to use cash to ease the liquidity problems in other projects that have been suspended.

Zhengzhou's solution to solve the problem of projects shutdown and loan suspension has a positive role in solving the problem of"rotten-tail building" in Zhengzhou and is also an example for other cities across the country to explore the solution to the plight of real estate enterprises, Yan Yuejin, research director at Shanghai-based E-house China R&D Institute told the Global Times on Sunday.

"Such funds have a very good leverage effect," Yan said.

He noted that at present, the funding gap of some key projects in Zhengzhou is about 1.5 billion per project and in accordance with the operating mode of the parent and sub-funds such gap can be filled with only 180 million yuan from the parent fund.

The operation of such scheme has pulled all kinds of social funds, especially  from asset management and commercial banks, which will objectively enhance the financial capacity to solve the problem, Yan said.

"It has a very good significance for the rapid solution of the problem of the unfinished building project in the third quarter," Yan said.

At a meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee held on July 28, it was made clear that efforts should be made to stabilize the real estate market and local governments are held accountable, ensuring house deliveries and people's wellbeing.

In addition to Zhengzhou, many Chinese cities have been experimenting with new models to address the difficulties of real estate companies as well as legal rights of home buyers.

For example, in Xi'an, Northwest China's Shaanxi Province has ordered commercial housing pre-sale funds to be directly deposited into the special supervision account for inspection.

Local governments in Xianyang, Northwest China's Shaanxi Province and Pingdingshan in Central China's Henan Province have set up a customized work group to address the suspension of projects and loans based on a one-project, one-solution principle.