China tries to look past the property slump

What will China look like in 40 years? Some forecasters think its economy will be two-thirds bigger. Others predict its population will be a quarter smaller. No one knows what technological marvels or political upheavals might intervene. China has, after all, changed out of all recognition over the past 40 years.

Thanks to new rules issued on August 28th some homebuyers will be able to watch the next four decades unfold before paying off their mortgage. China’s financial regulators have told banks they can offer loans of up to 40 years to creditworthy homebuyers. The instruction was one of a flurry of reforms to China’s property market, which has been in the doldrums since 2021. The slump has not lasted 40 years. But it sometimes feels like it has.

The new rules also allow banks to extend loans of up to seven years to property companies—the maturity is supposed to match the length of the construction it is financing. Another initiative would let developers pay for land in instalments. Land, however smoothly graded, has always been a lumpy investment. To meet the upfront cost, firms have often resorted to heavy borrowing. The new payment model could ease that compulsion.

If banks and local governments play along, these reforms could help homebuyers and builders smooth out their debts. But there is a catch. China’s regulators have simultaneously tightened up another source of finance: “pre-sales”. Developers often sell flats to homebuyers before they are finished. The proceeds are supposed to be spent on the pre-sold project itself. But in the boom years hard-charging companies like Evergrande, a giant developer, would often use the money on other ventures instead.

When the property crisis struck, many companies lacked the cash to finish pre-sold flats. Evergrande’s own backlog has taken five years to clear. The chief choreographer of this excess, Hui Ka Yan, the company’s founder, was last month sentenced to life in prison.

China’s regulators are keen to avoid any repeat of the pre-sales debacle. Developers will not now be able to sell flats in new projects until they have finished erecting the building’s main structures. The proceeds will flow into supervised escrow accounts. And money will not reach them until the flat is completed.

The reforms should in principle foster a less accident-prone market. They will, however, also make it even harder for property companies to start new projects, weighing on their revenues and employment. China’s government seems keen to look past the country’s property crisis. Developers do not have that luxury. Perhaps it will be over by 2066.■