China unveils a package to boost the real estate sector

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Beijing announced some of its strongest steps yet to revive its debt-laden real estate sector on Friday, allowing local governments to step in to buy up properties and easing mortgage rules as it seeks to boost the recovery in the world's second-largest economy.

China's faltering real estate market has been at the heart of concerns about the economy, as a backlog of unfinished projects has weakened consumer confidence and undermined the finances of local governments.

Beijing has given the green light to the authorities to buy some housing projects and convert them into public housing to help set a minimum limit for price declines. They will also be able to buy land from distressed developers.

Analysts have long called on the government to buy up idle housing to help restore confidence among consumers burned by years of low prices.

Meanwhile, China's central bank eased mortgage lending requirements, lowering the minimum down payment for first-time homebuyers from 20 percent to 15 percent.

The People's Bank of China said it would also abolish minimum interest rates on mortgages, allowing provinces to “independently set minimum commercial individual housing loans for first and second homes in each city under their jurisdiction.”

“In cities with a large commercial housing stock, the government may need to consider purchasing some housing… at affordable prices to use as affordable housing,” Vice Premier He Leveng said on Friday.

The Hang Seng Property Index on the mainland in Hong Kong rose 5.3 percent versus a 0.9 percent rise for the benchmark Hang Seng Index after the announcement.

These measures came after China's National Bureau of Statistics released figures showing a further decline in the housing market in April, which analysts said affected consumer sentiment and slowed China's economic recovery.

“The downward spiral in the real estate sector worsened in April, as real estate investments and new home sales showed larger contractions, while housing price declines worsened,” Nomura Bank said in a report on National Bureau of Statistics data.

The National Bureau of Statistics said property prices in so-called first-tier cities fell by 2.5 percent year-on-year in April.

China's economy has shown mixed signs of recovery in recent months, with exports returning to growth in April and some consumption indicators rebounding, but the real estate sector remains weak.

The Office for National Statistics said industrial production grew 6.7 percent year-on-year in April, beating economists polled by Bloomberg's expectations of 5.5 percent and 4.5 percent growth in March.

However, retail sales grew just 2.3 percent from a year earlier, well below analysts' expectations of 3.7 percent, and down from 3.1 percent growth in March.

“China's April economic report showed continued unevenness. Industrial production outperformed… while domestic retail sales growth slowed, partly due to base effects. “More policy support is needed to support the economy.”

The government is stepping up fiscal stimulus efforts, with the People's Bank of China selling 1 trillion renminbi ($140 billion) of long-term bonds on Friday. Before the sale, a government adviser said the bonds were intended to “give full play to the critical role of government investment in supporting economic growth.”

Chinese policymakers are increasingly relying on investment in the industry to offset lagging growth in other sectors and relieve pressure on the faltering real estate market and debt-burdened local governments. High-tech industrial manufacturing was a bright spot in the April data release, expanding 11.3 percent from a year earlier.

But the industrial policy is fueling trade tensions with the United States and the European Union, China's most important export markets, which have accused Beijing of unfair trade practices by increasing excess capacity and flooding their markets with low-cost goods.

Lin Song, chief economist for Greater China at ING, said auto production rose 16.3 percent in April from a year earlier, but sales fell 5.6 percent, data that “may add fuel to the fire” due to accusations of… Excess energy in China. He added that consumption growth “is likely to remain moderate” this year “as consumer confidence remains pessimistic.”

Meanwhile, investment in fixed assets grew 4.2 percent year on year in the January-April period, lagging Bloomberg survey analysts' expectations of 4.6 percent growth and a 4.5 percent increase in the January-March period.