Chinese cities buy housing with PBOC-tied loans, says report

Chinese cities buy housing with PBOC-tied loans, says report

Some Chinese cities have started to take advantage of low-cost funds from the central bank to purchase unsold homes and convert them to rental housing, a local media report showed, several months after the policy was introduced to help address the nation’s property crisis.

Skyline of Hong Kong's luxury housing area (Bloomberg)(Bloomberg)
Skyline of Hong Kong’s luxury housing area (Bloomberg)(Bloomberg)

Major cities including Qingdao and Fuzhou have purchased apartment buildings for the purpose of subsidized rental housing, the Economic Observer reported Thursday, citing unidentified sources. The transactions were done via so-called rental housing loans, the local news outlet said.

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The People’s Bank of China set up a specialized monetary tool for this purpose in early 2023, encouraging seven financial institutions to extend loans in eight trial cities, one of a number of initiatives it’s launched. The facility was aimed at bulk purchases of existing homes, which would both reduce the overhang of unsold properties and expand the supply of affordable rental housing.

The PBOC had promised to provide as much as 100 billion yuan ($14 billion) for banks participating in the initiative. No funds was extended under the program as of end-September, the central bank’s latest quarterly data showed, implying it took lenders and cities months before they’re able to utilize the tool.

“Authorities have been prudent in carrying the pilot program to make sure it’s a success,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. “Therefore reliability and risk-manageability are prioritized over speed and efficiency.”

“Once the experiments are done successfully, the roll-out of the program will gain momentum,” he added.

Debt Concern

Some of the cities bought properties from local government financing vehicles — government-backed entities, the Economic Observer said. This method eases local debt risks and reduces excess housing stock at the same time.

LGFVs have been in focus in China’s property slump as many have had severe cash-flow strains. National authorities have been pressing for a clean-up of bad debt tied to LGFVs.

Pang said the decision to pick LGFVs for the program likely reflects the fact that cities are more familiar with the operations of government-linked firms than with private businesses. LGFVs have more local knowledge and connections, a likely advantage when operating the rental housing program, he said.

The initiative underscores China’s effort to shift its housing sector toward more of a public housing model, taking a page from Singapore’s social housing structure — seen as creating a more sustainable and healthy real estate market.

Such efforts could also rekindle property investment and construction, helping to end a multi-year property slump that has weighed on economic growth and hammered consumer confidence in the world’s second-largest economy.

The loans extended to cities carry an interest rate as low as 3%, with the underlying funding from the PBOC to the financial institutions set at a rate of 1.75%. They also have long maturities and so can be rolled over in an extended period of time as long as cities are able to pay the interest with the rental income generated, the newspaper said, citing unnamed local officials.

Other than the rental housing loan program, the central bank in December provided 350 billion yuan in low-cost funding to finance projects that build social housing and renovate run-down inner city districts.

The PBOC is expected to provide an update on use of its tools later this month, potentially confirming that banks have tapped the funds for the rental program.

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