Chinese policymakers clash over easing measures to counter real estate crisis

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Chinese regulators led by Vice Premier Liu He fear the government is underestimating the economic impact of its crackdown on the property sector and Covid-19 lockdowns in Shanghai and other cities, officials and other cities say. political advisers.

But other senior officials have opposed efforts by Liu, a longtime financial and economic adviser to President Xi Jinping, to ease pressure on the real estate sector, six Beijing-based government officials and political advisers told the Financial Times.

Political disagreements within the Chinese government highlight the tough choices it faces as it tries to sustain growth in the world’s second-largest economy while pursuing a tough zero-Covid strategy and taming heavily indebted property developers.

China’s gross domestic product rose 4.8% year on year in the first quarter, but a 3.5% drop in retail sales in March suggested that anti-Covid controls were slowing down an economy already in the grip of the real estate market difficulties. On Tuesday, state media reported that Xi had called for accelerating investment in a wide range of critical infrastructure sectors, but did not specify an amount or timeline for the effort.

Liu, who heads a powerful committee that coordinates policy between the central bank and China’s banking, securities and other regulators, backed recent moves by many regional governments to ease restrictions on property purchases.

But according to officials and political advisers, two other vice-premiers – Han Zheng and Hu Chunhua – have sided with the Housing Ministry in wanting to keep pressure on developers by tightly regulating how they can use the revenue. of the project.

Chinese Vice Premier Liu fears the government is underestimating the economic impact of its crackdown on the property sector © Saul Loeb/AFP/Getty Images

Liu’s Financial Stability and Development Committee wants to give debt-ridden developers more freedom to deploy income from buyers who prepay their homes. Over the past year, local governments have ring-fenced sales revenue so that it is only used to carry out the relevant project.

“It is already common for lenders, whether banks or bond investors, to grant repayment extensions to developers,” said a government adviser who shared Liu’s concerns. “Continued weakening of the industry may lead to an increase in bad debts and the bankruptcy of the entire financial sector.”

An executive from Sunac, a major developer based in the port city of Tianjin, said property companies should be allowed to use proceeds from the sale of new projects to pay off debts owed on older projects to avoid losses. payment defaults.

“If we raised 1 billion Rmb ($153 million) in revenue that would be spent over three years on a project, why can’t we allocate 100 million Rmb of that for use elsewhere and [repay it] later,” said the executive, who asked not to be named.

Supporters of Han and Hu argued that fears about the impact on China’s largely state-owned banking sector were overblown. “Not every bank will go bankrupt,” one of the people said. “We can always have healthy banks to bail out struggling ones.”

While Liu has long been considered China’s most powerful economic and financial official, Han is the highest-ranking of the three deputy prime ministers. Han sits on the Chinese Communist Party’s most powerful body, the Politburo Standing Committee, and is considered a leading candidate to replace Li Keqiang as premier next year.

Liu also urged local governments in areas affected by Covid shutdowns to protect supply chains and help businesses get back to business.

The port city of Tianjin

The port city of Tianjin. A property manager said companies should be allowed to use proceeds from the sale of new projects to pay off debts owed by older projects © Zhang Peng/LightRocket/Getty Images

But faced with China’s worst economic conditions and outlook since at least the start of the pandemic, financial policymakers have responded in recent weeks with only modest easing measures.

Their reluctance stems in part from fears that stronger stimulus measures will have only limited effectiveness, particularly in regions immobilized by Covid lockdowns.

Liu and Yi Gang, a governor of the People’s Bank of China and a well-respected technocrat who was named central bank chief at Liu’s insistence, are also wary of broad-based rate cuts. They fear this will undermine progress made over the past five years in stabilizing China’s overall debt-to-GDP ratio.

Liu and Yi also share growing concerns that with US interest rates now higher than China’s for the first time in years, rate cuts could weaken the renminbi and trigger destabilizing capital flight. .

“Current economic policy may not be [aggressive] enough,” said an influential Beijing scholar, who asked not to be named because he did not have university approval to speak to the media. “But since the United States started raising rates, the renminbi started to depreciate. If we [cut rates] The renminbi’s depreciation could spin out of control.

Almost every expression of political support from the PBoC and the central government’s state council in recent weeks has been qualified by caveats that they will not resort to “flood-type stimulus” and remain committed to “maintain generally stable macroeconomic debt levels”.

On Tuesday, such comments from the central bank halted a sharp sell-off sparked by fears that tough lockdown measures in Shanghai could be extended to Beijing.

The PBoC’s comments reiterated pledges to use “prudent” monetary policy to support small and medium-sized businesses, which have borne the brunt of lockdowns, while promising to bolster banks’ lending capacity.

But similar reassurances from Liu in mid-March, when the benchmark CSI 300 index was on the verge of falling to a two-year low, had only a temporary effect. The recovery quickly faded when the PBoC announced only a 25 basis point cut in banks’ reserve requirement ratios, potentially freeing up around Rmb500 billion of new lending to China’s Rmb114 billion economy. Rmb per year.

“Liu and Yi are afraid to reinflate the bubbles,” said a person who worked closely with Yi. “They want to provide cash to those who need it, but think they can do it [through bank reserve requirement cuts and targeted lending guidelines] rather than using general measures.

“Opening the floodgates is great for other parts of the country that aren’t affected by the shutdowns, but for those that are, it won’t make much of a difference.”

Additional reporting by Emma Zhou in Beijing

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