Every property destocking journey begins with a first step. S&P Global Ratings believes Beijing's injection of renminbi (RMB) 350 billion into upgrading upper-tier cities will help property developers cut inventory. The benefits will flow through a somewhat complicated process, but the impact could be substantial if the program lasts for a few years.

We see an echo of China's shantytown redevelopment program, which sparked a property boom and greatly aided developers in destocking. In 2016, the first full year of the program, real estate firms saw a reduction of 250 million square meters of inventory, and sales climbed by more than one-third.

The extra money will initially benefit central and local state-owned developers that are focusing on higher-tier cities, in our view. Examples include China Overseas Land & Investment Ltd. (COLI; BBB+/Stable/--) and China Resources Land Ltd. (BBB+/Stable/-), which could get a boost in sales and liquidity.

Why This PSL Matters

In December 2023, Beijing announced a RMB350 billion "pledged supplementary lending" (PSL) program. The plan involves the central bank lending to Chinese policy banks, so that the lenders can fund three major projects: affordable housing, urban village redevelopment, and public facilities. These three major projects are important drivers to stabilize economic growth and restore confidence in the property market.

Urban village redevelopment is the redevelopment of land collectively owned by residents in such villages. These were originally farming collectives that got absorbed into urban areas as cities expanded.

PSL is not a new policy tool. Beijing used it extensively during 2014-2019 to fund the shantytown redevelopment program.

It involves China's central bank lending to policy banks (for example, China Development Bank) to provide loan capital to projects that fulfill policy goals.

Unlike commercial banks, policy banks aim first to support government policies, and do not prioritize commercial returns. Furthermore, PSL have low interest rates (currently at 2.4%, 10 basis points lower than medium-term lending facilities). The loans typically have longer tenor than for lending to similar entities on a commercial basis. This should mean that the project managers will receive relatively lower-cost and longer-tenor capital, which bolsters the viability of their investments.

The government largely halted liquidity injections via PSLs during 2020-2022. However, Beijing started to use the tool again in September 2022. Officials introduced RMB630 billion via PSL during September-November 2022, mainly to ensure completion of presold homes by distressed developers and support infrastructure spending.

Unlike the prior round, we believe the RMB350 billion PSL injection in December 2023 could be meaningful for developer destocking. Two of the three policy targets--affordable housing and urban village redevelopment--are aimed at property, and could be used to buy existing homes held in inventory by real estate firms. This is particularly the case in the higher-tier cities, at which these two policies are targeted.

Chart 1

This is consistent with our expectation that Beijing is using an array of policies to stabilize higher-tier property markets. If property sales stabilize in these markets, this could gradually bolster confidence in other regions (see "China Still Has More Policy Tools To Stabilize The Higher Tier Property Markets," Sept. 25, 2023).

The funds injected in December were the third biggest such infusion in the history of the PSL program. However, it is still only about one-tenth of the peak of accumulated net lending through PSL of about RMB3.6 trillion, as at the end of 2019 (see chart 1).

In other words, the recent injection cannot match the sharply stimulative impact of the shantytown redevelopment program, yet. If, however, Beijing rolls out similar PSL injections each year for about four years, the program could become large, and its potential destocking effect could be comparable with the shantytown policy.

The Long And Winding Road To Destocking

The path to destocking will be circuitous. We assume urban village redevelopment will be more effective in helping developers to destock than affordable housing.

However, there is no full transparency in terms of what portion of the funds will go to public facilities, which will likely have a zero impact on property firms. Likewise, we are not clear on what portion of funds will be shared between affordable housing and urban village redevelopment.

In providing funding for affordable housing, the local firms involved in the projects may buy existing inventory from developers. While this may bolster sales and cut inventory, execution uncertainties remain, for example, about from whom the local firms should buy, and at what prices.

It is a critical matter. In September 2023, primary housing inventory in tier-one cities' stood at 14 months of sales. The stock in second-tier cities was 18 months, while the figure for lower-tier cities was 24 months, according to China Real Estate Information Corp., a data firm. This compares with about 10 months of inventory for all city tiers before the crisis. The excess acts as an overhang, depressing prices and sentiment, and discouraging new building activity.

However, if a project manager chooses to build new affordable housing units instead of buying existing inventory from developers, it will instead create more supply than to help clear developers' inventory.

The X-Factors For Urban Village Redevelopment

We assume urban village redevelopment will be more effective in helping developers to destock because the program pays people to relocate. Such residents create real housing demand.

Of the different compensation choices offered to the affected residents, vouchers have the most straightforward impact on developer destocking. An affected resident would hand over a voucher to a developer in exchange for a new home. However, only a selected list of developers could benefit. Referencing Guangzhou as a case study, we assume such developers are more likely to be state-owned (see box).

Vouchers' limitations may prompt residents to choose other options. If a resident chooses to be compensated by cash, they could buy a new home from any developer they want. However, they may also choose to spend the money on something that isn't property, or to put it in a bank account.

Connecting The Dots

We have to connect a lot of dots and make many assumptions to believe that China's recent PSL program will meaningfully result in developer destocking. It is not explicitly aimed at such an objective, and surely that would not be a job for policy banks.

However, we see in the details support for the developers, at least as a secondary effect, we assume. For example, the PSL scheme replicates many of the effects of the government's shantytown development in the past years, which was rocket fuel to the Chinese property market.

The recent PSL program is also aimed at higher-tier cities, which is consistent with our understanding of Beijing's plan to fix China's property market, which is to begin by restoring confidence in the upper-tier cities.

Lastly, there is the simple fact that two of the three legs of the PSL scheme involve property. Given the continued weakness of the sector, and corrosive effect this is having on the national economy, we believe this is not an accident.

If this plan is at least partly about helping developers destock and helping the property market recover, Beijing will likely need to add more money. Conveniently, the PSL is a conduit for channeling a great deal of cash.

Writer: Jasper Moiseiwitsch

Related Research

• China Property Watch: A Slow, Sequential Recovery In 2024, Oct. 16, 2023
• China's Reforms Need A Confidence Booster, Oct. 9, 2023
• China Still Has More Policy Tools To Stabilize The Higher Tier Property Markets, Sept. 25, 2023