China's Government Is Expected To Buy 24% Of All Residential Real Estate For Sale In 2017

Back in March, we explained why the "fate of the world economy is in the hands of China's housing bubble." The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth will keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting "wealth effect", in China it has always been about housing: three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US with the remainder invested financial assets.

Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, "smooth landing" process. 

The other reason why China is so eager to keep its housing sector inflated - and risk bursting bubbles - is that as shown in the chart below, in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice the total local disposable income of RMB12.9 trillion. For any Fed readers out there, that's how you create a wealth effect, fake as it may be. 

Unfortunately for China, whose record credit creation in 2017, and certainly in the months leading up to the 19th Chinese Communist Party Congress which started last week, has been the primary catalyst for the "global coordinated growth", the good times are now again over, and according to the latest real estate data released last week, property sales in China dropped for the first time since March 2015, or more than two-and-half years, in September and housing starts slowed sharply reinforcing concerns that robust growth in the world’s second-largest economy is starting to cool.

Property sales by floor area fell 1.5% in September from a year earlier, compared with a 4.3% increase in August and a 34% jump in September 2016, according to Reuters calculations based on official data released on Thursday. That marked the first annual decline since the start of 2015. Separately, new construction starts by floor area, a volatile but telling indicator of developers’ confidence, rose just 1.4% in September on-year, slowing from a 5.3% increase in August, according to Reuters calculations.

“The negative September sale number shows that, unequivocally, the property boom has peaked,” Rosealea Yao, a property analyst at Gavekal Dragonomics told Reuters. “We have seen some big rebounds at the end of the first and second quarter, but given how fast the sale numbers are declining, we expect no big rebound this time.”

Echoing our concerns above, Reuters writes that "real estate, which directly affects 40 other business sectors in China, is a crucial driver for the economy but also poses a major risk as Beijing looks to tame soaring home prices without triggering a crash or a sharp drop in construction activity.

The easing in property activity appeared to drag on broader growth in the third quarter, and as many economists predicted China’s GDP rose 6.8% in the third quarter from a year earlier, down from 6.9% in the second quarter. And while property investment did rise 9.2% in September, picking up pace from an expansion of 7.8 percent in August, analysts warned such investment usually lags sales trends by up to six months.

Still, as discussed here previously, while home prices have sharply softened in China's biggest, Tier-1, cities in recent months in response to a flurry of government cooling measures, property bubbles are still a threat in other parts of the country.

A flurry of small cities have had to unveil fresh property curbs in recent weeks after speculators turned their attention to less-restricted cities that have massive overhangs of unsold houses.

Moreover, in addition to many buyers purchasing second houses on credit as Deutsche Bank pointed out last month, high prices are forcing many home buyers to take on more debt, weighing on future household consumption and leaving banks more exposed to any property downturn even as Beijing looks to rein in financial system risks. Household loans, mostly mortgages, rose to 734.9 billion yuan ($110.80 billion) in September from 663.5 billion yuan in August, despite rising mortgage rates, according to Reuters calculations. Short-term loans also soared in the third quarter, suggesting speculators may be trying to circumvent property cooling measures, economists said.

What is most concerning, however, is that the recent sharp decline takes place even as policymakers have made stabilizing the overheated property market a top priority ahead of a critical Communist Party Congress this week, reiterating the need to avoid dramatic price swings which they fear could threaten the financial system and harm social stability.

Adn while a downward inflection point in China's housing market - which accounts for a third of China’s economic growth - is bad, what follows is far worse.

According to a fascinating new WSJ report, China's housing downturn is likely far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market,

As the WSJ notes, this latest backdoor bailout "It is a sharp illustration of China’s economy under President Xi Jinping and the economic challenges he will face as he renews his 5-year term at a twice-a-decade Communist Party Congress that opens on Wednesday."

Rosealea Yao from Gavekal Dragonomics, who was also quoted above, wrote that “the government’s creativity in coming up with new ways of supporting the housing market is impressive—but it’s also an indication that it still depends on housing for growth."

While traditionally, China’s government used to build homes for families who lost theirs to development or decay, last year, local governments, from the northeast rust belt to the city of Bengbu with 3.7 million amid the croplands of central Anhui province, spent more than $100 billion to buy housing from developers or subsidize purchases, according to Gavekal Dragonomics.

In other words, the reason why China no longer has ghost cities is because the government is buying them in just as concerning, "ghostly" transcations.

The underlying structure is yet another typically-Chinese ponzi scheme:

Underpinning the strategy is a cycle of debt. Cities borrow from state banks for purchases and subsidies, then sell more land to developers to repay the loans. As developers build more housing, they, too, accrue more debt, setting up the state to bail them out again. The burden on the state rises, as does the risk of collapse.

What is astounring, is that while the government has tried other ways of filling apartments, such as offering cash subsidies to encourage rural migrants to buy in urban areas, the program is the first large-scale case of the government becoming a home buyer itself. In May, Lu Kehua, China’s deputy housing minister, said the program has “played a positive role in steady economic growth,” and called for a push to clear housing inventory as early as possible, according to an article by the official Xinhua News Agency.

Well, of course, it's played a "positive role" - when the government itself is buying half the units it bought (see chart above), what can possibly go wrong? Well, pretty much everything if the housing market is once again headed lower and with the explicit backing and funding of the Chinese government.

Some more fascinating details on how China fooled the world into believing back in 2014 that its recently burst housing bubble had "smoothly landed" and was again recovering:

Three years ago, Bengbu’s housing prices were falling. Housing inventory in 2014 would have taken almost five years to fill at the pace of sales at the time, said Shanghai-based research firm E-House China R&D Institute. Around the same time, the Bengbu government began to gobble up homes, and it has continued to do so. The city said it bought nearly 6,000 apartments from developers last year.


Housing stock in Bengbu was down to four months in September, a city official overseeing the government program said in September. Home prices had increased by 15% in August from a year earlier. That exceeded the 8.2% growth across a benchmark of 70 cities compiled by the national statistics agency.


Beijing and Shanghai residents are used to such price surges, but it is unusual in a smaller Chinese city lacking any particular tourism or job-market appeal.

Naturally, China would rather not have details of its latest bailout program spread too far:

Bengbu officials are wary about publicizing its hand in the market for fear of driving up prices and speculative buying. “We don’t mention it as much now as in the past two years,” the city official in charge of the program said. “Prices have been fluctuating a lot, and it’s a little bit out of control.”

Since the launch of the program, which is an explicit subsidy to Chinese real-estate developers who are directly selling to the government, things have predictably normalized. In fact, the outcome has been a little too frothy:

In 2015, groups of families on government-organized apartment tours started showing up, said Ding Qian, a planner at the developer, Bengbu Mingyuan Real Estate Development. By October 2016, the developer had sold 20 blocks of finished apartments, about 10% of them paid for with government funds, Ms. Ding said.


“We have run out of apartments to sell,” she said. The developer has sped up construction of 42 new blocks, about 4,000 apartments, and has raised prices by 40%.

All thanks to the government, which is lending to local governments to avoid the impression it is directly involved in bailing out China's "wealth effect":

The Bengbu official in charge of the program declined to disclose details about the city’s apartment purchases, but said the city had borrowed 10 billion yuan ($1.5 billion) of the 19 billion yuan of available credit extended by China Development Bank for housing purchases and subsidies.


Local governments in 2016 borrowed 972.5 billion yuan from the bank, the government’s main housing lender, nine times the level three years earlier, according to E-House China R&D Institute, which compiled data from official bank and government websites. More than half of last year’s loans went to purchases or subsidized buying, according to the official Xinhua News Agency. The rest of the loans funded housing projects built by the government.

What is most frightening, is that despite the decline in property sales, the government’s role in the housing market continues to grow according to the WSJ, and here is a stunning statistic: Of all the residential floor space sold in China last year, 18% was purchased by government entities or with state subsidies, E-House China determined from official government data. The share could reach 24% this year, the firm said.

To paraphrase: Beijing is now the (covert) marginal buyer of a quarter of all Chinese real estate. That, in itself, is a mind-blowing statistic. What is scarier, is that despite this implicit backstop, property sales are once again declining after 30 months of increases. One can only imagine the epic crash that would ensue if - for some reason - the government bid were to be pulled, and just how spectacular the ensuing global depression would be as the rug is pulled from under the most important asset of the middle class in the world's fastest growing economy.


Herp and Derp CRM114 Sun, 10/22/2017 - 19:58 Permalink

I wonder how much of the commercial and industrial buildings are bought by the government.  My recent trip out from Shanghai to the 'burbs' made me think they are filling in the space between population centers.  It isn't a bad idea, though you can tell even at 300km/hr which buildings/areas are vacant.It is a deliberate and somewhat smart attempt to paper over the old China.  Most of the 'industrial/residential' areas that aren't planned look like junk yards that stretch to the horizon.  I assume that is what many of these new areas looked like before, so it is an improvement even if the buildings will need replaced in twenty years.

In reply to by CRM114

tmosley Sat, 10/21/2017 - 20:36 Permalink

Commies are dumbshit fuckups, news at 11.The only surprising thing here is how long these morons went without destroying themselves.

Giant Meteor tmosley Sat, 10/21/2017 - 20:52 Permalink

No, no .Fascinating as in "One can only imagine the epic crash that would ensure at this moment, if - for some reason - the government bid were to be pulled, and just how spectacular the ensuing global depression would be as the rug is pulled from below the middle class of the world's fastest growing economy."Seems like a common, recurring theme eh?

In reply to by tmosley

Offthebeach Giant Meteor Sun, 10/22/2017 - 13:33 Permalink

How much outside money, credit is tied into Chinese real estate, mortgages and such? I don't feel any clear mechanics of internal Chinese laws, finance, behavior.   So more so then trying to predict anything, say in the US with our Fed, TBTF banksters, Fed Gov and all the rest of our greedy clowns.....China? Fughedaboutit.

In reply to by Giant Meteor

DaBears tmosley Sat, 10/21/2017 - 23:54 Permalink

Don't worry, they going to send people telling us how "their debt is all internal", another way saying they can create thousands of trillion mao-nopoly money out of thin air and have "Zero consequences" because westerners hasn't a clue and no one  ever thought of just print your way to make everyone "mllionaires". Yep, hyper-inflation doesn't happen because "Made in china" substandard infrastructures looks awesome.

In reply to by tmosley

uhland62 Sat, 10/21/2017 - 20:44 Permalink

China is a big elephant to topple, so I wouldn't worry. So the government owns apartments, good heavens. They can house people and avoid the San Diego situation, they can house people after a flood and earthquake, they can also sell some of the apartments, whatever.Much better than living in school halls after a hurricane etc. The one thing China likes to avoid is people living in the streets and start torching things. I reckon, that's a good one. 

Thethingreenline Sat, 10/21/2017 - 21:29 Permalink

China built the ghost cities in anticipation of the economic collapse of the West. When that collapse occurs, they shift their people into the ghost cities and internal demand for their stuff. The West will be third world, with collapsing infrastructure.
The end.


Gladi8tor Sat, 10/21/2017 - 22:11 Permalink

 Today, however, such an impossible scenario is precisely what China is facing. Virtually every growing environmental and health problem can be traced back to modern food production. This includes but is not limited to:

  • Food insecurity and malnutrition amid mounting food waste
  • Rising obesity and chronic disease rates despite growing health care outlays
  • Diminishing fresh water supplies
  • Toxic agricultural chemicals polluting air, soil and waterways, thereby threatening the entire food chain from top to bottom
  • Disruption of normal climate and rainfall patterns

up to 80 percent of China's water supply is pollutedThe Wealthy Chinese are leaving in droves and are honing in on San Francisco and Las Vegas Real Estate

Gladi8tor Sat, 10/21/2017 - 22:11 Permalink

 Today, however, such an impossible scenario is precisely what China is facing. Virtually every growing environmental and health problem can be traced back to modern food production. This includes but is not limited to:

  • Food insecurity and malnutrition amid mounting food waste
  • Rising obesity and chronic disease rates despite growing health care outlays
  • Diminishing fresh water supplies
  • Toxic agricultural chemicals polluting air, soil and waterways, thereby threatening the entire food chain from top to bottom
  • Disruption of normal climate and rainfall patterns

up to 80 percent of China's water supply is pollutedThe Wealthy Chinese are leaving in droves and are honing in on San Francisco and Las Vegas Real Estate

Posa Sun, 10/22/2017 - 09:34 Permalink

It's smart for the Chinese to convert speculative housing to social housing... that alleviates tensions and political unrest. Imagine if huge towers were kept empty while large masses of people were stuck in slum housing... the recent party meetings stated that "Housing is not for speculation" ... an important reform

J Mahoney Sat, 10/21/2017 - 23:46 Permalink

Big NOTHING BURGERSo what, China government bought housing. There welfare system is slightly different than ours.China buys housing, rents very reduced rates to low paid employees of government owned businesses and their retirees.USA Method: Build public housing, let dumb asses move in and tear it up within 10 years and repeat again....or sign up a lot of people in section 8 and entice investors to "slumify" rich zip codes in the name of diversity.

truthalwayswinsout Sun, 10/22/2017 - 00:20 Permalink

Beijing is not the name. It is Peking.China is so corrupt that if a magic fairy went around and cast a spell one night and stopped all corruption by making all the corrupt people disappear, all economic activity in China would end overnight because no one would be there except the 400 Million peasants.The US is so corrupt that about 2% of the population would disappear and all of the federal government and state and local governments would be gone.

Batman11 Sun, 10/22/2017 - 03:30 Permalink

“Can we avoid another financial crisis?” by Steve Keen is the must read book for Central Bankers.Ireland, Hong Kong, Norway, Sweden, Belgium, Australia and South Korea are also in trouble due to their debt.Perhaps China’s central banker purchased a copy and looked in horror at the diagram on page 97, China was due for a Minsky Moment. I had purchased the book some time ago and was well aware of its plight.Steve Keen saw 2008 coming in 2005 by looking here. 1929 and 2008 stick out like sore thumbs.If only the FED had consulted the expert.

Let it Go Sun, 10/22/2017 - 10:24 Permalink

The government of China has been concerned over rising house prices for years.  Following the Central Economic Work Conference in December of 2016, it issued a statement saying,  "Houses are built to be inhabited, not for speculation." This underlines the problem that over the years low investment returns in the real economy and easy credit have triggered excessive growth in property prices.What many people in America don't realize is that in most cases these apartments are sold with internal walls and electrical outlets in place but everything else, including doors, flooring, and bathroom fixtures will need to be built-out by the owner after purchase. The article below delves into some of the hidden risks lurking in China's housing market that are often ignored.

roddy6667 Let it Go Tue, 10/24/2017 - 21:40 Permalink

The Chinese real estate system is different than America's. New American homes are sold by the developer with very basic amenities. They have wall-to-wall carpeting, cheap cabinets, cheap windows, a  cheap roof, etc. If you want upgrades, the builder supplies them. BTW, this is where the buildeer makes most of his profit. In China new homes are sold as concrete shells, plastered, but with only rough plumbing and electric. A few builders will aslo finish homes, but the vast majority of builders do not do that. In every city there are dozens of huge design centers where you can customize the finishing of your home. The choices are very high quality and the variety is amazing. This is paid for in cash by the home buyer. In China most new homes are purchased in cash and the buyer has the 20% cash needed to finish it. In America, almost everybody uses a mortgage and they don't have the cash to do the upgrades themselves. The builder does the work and it all gets wrapped into the mortgage. 

In reply to by Let it Go

Dragon HAwk Sun, 10/22/2017 - 14:57 Permalink

I know i have been living under a rock, but this is the first time i remember reading that The Chines government is Buying up the Surplus Housing market to keep the prices High. seems Counter intuitive to a  free market.

Sudden Debt Sun, 10/22/2017 - 17:36 Permalink

At the expense of the the expense of the future... young kids will pay higher prices for real estate of the older.young kids will pay higher taxes by taxation and inflation for the real estate of the older people.  

chickadee Sun, 10/22/2017 - 18:13 Permalink

As long as humans are willing to let wealth be created out of nothing, those in charge of the supply of money will continue to pervert the natural course of events.