Regulators in China have unveiled sweeping measures to bolster the country’s struggling real estate sector, as regulators seek to offset years of China’s harsh pandemic curbs and a real estate clampdown that have stalled the world’s second-largest economy.

Banking regulators and China’s central bank issued a 16-point set of directives to promote China’s industry’s “stable and healthy development,” which were confirmed by Chinese media on Monday.

Credit assistance for China’s debt-ridden housing developers, financial assistance to ensure project completion and handover to homeowners, and assistance for deferred-payment loans for homebuyers are among the measures.

On the same day, China’s National Health Commission issued 20 rules for “optimizing” Beijing’s zero-Covid policy, in which certain restrictions were relaxed to limit the policy’s social and economic impact.

“We see this as the most critical turning point since Beijing significantly tightened property financing,” wrote Ting Lu, a chief China economist.

“We believe these actions show that Beijing is willing to reverse most of its financial tightening measures.”

Following the announcement of the measures, Hong Kong stocks rose more than 3% on Monday, extending Friday’s more than 7% gain.

In 2020, Beijing imposed widespread lending restrictions on property developers, hampering liquidity problems and causing several of the largest property developers to default on bond payments.

The repercussions on China’s massive real estate sector were severe. Cash-strapped developer Evergrande – China’s largest – failed to compete for projects, sparking mortgage boycotts and homebuyer protests.

According to a copy circulating online, the measures emphasized “guaranteeing a handover of buildings” and ordered central development banks to provide “special loans”.

The document required financial institutions to treat both state-owned and private real estate enterprises equally and “actively collaborate with distressed real estate enterprises in risk management.”

In addition, the measures included “extending the transition period of real estate loans” for China’s distressed developers and assistance for “high-quality real estate enterprises in China to issue bond financing.”

“The plan includes financial stability measures to prevent massive defaults and thus provide a soft landing,” said ANZ analysts.

Analysts, however, warned that these changes, along with the limited loosening of zero-Covid measures, would not result in an immediate recovery for the ailing sector.

New home prices in China have been crashing for over a year, while demand has struggled to recover due to ongoing strict pandemic controls that have dampened consumer confidence.

What Doomed China’s Property Market

Following the structural crisis in the real estate sector in 2021, reforming the property market appears unavoidable, and implementing a better property tax system in China is the first step toward property market reform.

According to the Diplomat, the Chinese Communist Party’s official theoretical journal, top leader Xi Jinping identified a property tax system in China as the flagship project for property sector reform and a critical component of his “Common Prosperity” campaign.

The National People’s Congress drafted and authorized a proclamation to expand the property tax experiment in response to Xi’s essay.

Liu Kun, Minister of Finance, stated that the Ministry must “prepare for property tax experiments.” As a result, a Chinese government insider predicted confidently that the central government would implement a property tax in China during the 2022 National People’s Congress.

In Xi’s opinion, the property estate market is the epitome of China’s unsustainable growth model. It accounts for nearly 25% of China’s GDP, a rate higher than that of Spain and Ireland before the Eurozone crisis.

Since the late 1990s housing market reform, Chinese housing prices have risen so rapidly that an apartment in Beijing costs 25 times the annual wage. As a result, high housing prices significantly burden the Chinese people, stifling consumption and innovation.

Furthermore, the collapse of Evergrande Group, one of China’s largest real estate developers, demonstrated that the Chinese real estate sector could become a ticking time bomb.

As a result, Xi has declared that “homes are for the living, not for investor speculation” and has made reforming the property sector his primary goal for the Common Prosperity campaign.

There are two root causes of China’s distorted real estate markets. On the supply side, the fiscal system reform of 1994 shifted tax money to the central government while not reducing the burden on local governments.

As a result, local Chinese governments cover more than 80% of total government expenditures while receiving only half of the tax revenue. Faced with local opposition, then-Premier Zhu Rongji, the architect of this reform, struck an agreement that allowed them to raise their government budget by any means necessary.

China’s artificial property prices

Thus, with Beijing’s approval, local governments throughout China use land sales as their primary source of revenue, artificially keeping property prices high.

A financial repression policy benefiting banks and state-owned enterprises deprives China’s households of viable investment options.

The Chinese middle class considers the ever-expanding housing market the most profitable investment opportunity. According to one Chinese observer, only the housing market consistently generates positive returns for investors.

A property tax is an ideal solution for correcting market distortion. It both discourages people from considering real estate as an investment vehicle and increases budgets for local governments.

As a result, Xi delegated the task of implementing a comprehensive property tax plan to Han Zheng, the executive vice premier and potential successor to Premier Li Keqiang after the 20th Party Congress.

Xi’s property tax plan, on the other hand, drew criticism from the communist party elites and rank-and-file members; even retired senior CCP party leaders petitioned against the new tax.

They argue that because many party members own multiple properties, the tax will be an unnecessary burden and a threat to social stability.

Furthermore, Xi’s ambitious goal of taming the property market is at odds with the interests of local officials, who prioritize generating economic growth, securing local government budgets, and preventing chaos.

Shanghai Cadres highlighted “stability” as the most important goal of their economic work for 2022. According to them, the Shanghai government will bail out property developers to prevent a housing market crash.

“The real estate price in Shanghai will never fall, just like the housing price in New York,” an official said. Another economic planning official stated that the Shanghai administration must also increase infrastructure investment by 14% to offset the shrinking housing market.

New Five-Year Plan

However, because most infrastructure has already been built, Shanghai is unlikely to meet this increased infrastructure investment target.

As a result, the government will support the housing market by removing restrictions on real estate developers receiving bank loans, selling houses, and issuing bonds.

What is the rationale behind this plan, which effectively undoes the five-year deleveraging campaign? After all, Xi has stated that GDP growth is no longer the only metric used to evaluate cadres.

In addition, the new Five-Year Plan eliminated the annual GDP growth target in favour of slower but more balanced “high-quality” economic growth.

The Shanghai administration official admitted that the city did not receive a central government economic growth target. However, the cadre also stated that the importance of economic performance is ingrained in officials’ minds due to comparisons with other local leaders.

Relaxing the “three red lines.”

Higher GDP growth remains the best way for ambitious officials to outperform their peers and secure promotion.

This is especially true for Li Qiang, a rising star in China’s politics who hopes to run for vice premier or a seat on the Politburo Standing Committee at the 20th Party Congress this fall.

Furthermore, the importance of stability trumped the importance of reform. At the end of 2021, the Central Government Work Meeting on Economic Affairs shifted away from Xi’s unwillingness to create a moral hazard by bailing out property titans.

The meeting emphasized the importance of stability and directed local governments to avoid economic crises. Following the meeting, Chinese banks are prepared to relax the “three red lines” to facilitate a soft landing for several real estate companies.

Another challenge Xi must face will be the complexities of China’s property market problem, which has accumulated over decades. The current institutions are so intertwined that incremental reform, which Beijing prefers over drastic and all-encompassing “shock therapy” reform, becomes impossible.

Construction employs 16% of the urban workforce. According to MacroPolo, the Paulson Institute’s in-house think tank, a construction industry collapse following a property market recession would put 15 million people out of work.

Unemployment would undoubtedly have an impact on social stability. Furthermore, Chinese banks made 30% of their loans for housing construction, and 60% of bank loans were collateralized by property. As a result, if the property market collapses, China will face a financial crisis.

As a result, a property tax will clash with other major social programs, causing unintended civil instability. It will increase rather than decrease civil inequality unless accompanied by hukou (household registration) reform.

The hukou system institutionally divides city dwellers from migrant workers, who remain officially registered as residents of their rural hometowns.

As a result, migrant workers cannot access city social welfare programs such as pensions, health care, and education for their children.

Property tax through higher rent

A property tax is intended to provide an alternative source of funding for social welfare programs, allowing local governments to move away from the traditional land-sale-for-funding scheme. 376 million urban migrant workers will contribute significantly to any property tax.

Even those who cannot afford to buy a home in a city will pay the property tax through higher rent.

Without hukou reform, migrant workers will be forced to pay for social services they cannot use. It may exacerbate tensions between newcomers to cities and long-term residents.

The failure of Xi to reform the property market exemplifies the difficulties that his Common Prosperity campaign faces. This campaign, according to Xi, is necessary not only to improve social equality but also to rebuild the Chinese economy.

His primary goal is to shift the Chinese economy away from its current investment-driven, export-oriented growth model and toward a more sustainable development model.

The campaign will almost certainly face opposition from vested interests concerned that the reforms will harm them. The desire for social stability, a recurring theme in Xi’s administration, will also counteract the desire for reform.

Xi once compared the current stage of Chinese reform to “cracking the bone after eating meat,” implying that his predecessors completed the easier parts of the reform while leaving him with the difficult parts. Xi will undoubtedly face tremendous opposition and challenge, as have reformers throughout Chinese history.