The future of China’s property policy (and iron ore)

Two points to make. Short-term, land sales are a key leading indicator for property development and iron ore. Currently cratering. Long-term, you will know that China’s iron ore era is over for real when a land tax is fully enacted. Mizuho with the note:

The government used to rely on administrative measures (such as home purchase restrictions and price caps) to regulate the market, causing problems like mini-cycles, price distortion, reliance on land finance, and low fertility rates.

The new framework is expected to comprise five aspects-land, finance, taxation, investments and legislation.

The framework focuses on both the supply and demand side and can be more targeted and preemptive

On the finance aspect-three “red lines”:

• To force overly indebted developers to deleverage and limit their ability to grow their land bank via aggressive borrowing;

• It favors developers with solid financial fundamentals and measured debt growth, while punishing weaker ones.

On the finance aspect-“collective management” of property loans:

• To cap bank lending to both property developers and home buyers, aiming to contain related financial risks over the long term;

• Likely limited impacts in the short term, given: 1) most major banks are already in line with the requirement, 2) a grace period of up to 4 years, and 3) flexibility of±2.5ppt for local small banks.

On the land aspect:

• A centralized system for land sales–major cities to coordinate residential-land auctions and hold them at 3 specified times each year. This should help developers to manage expectations and guide bids at a reasonable level.

• Land sales revenue to be collected by tax authorities–to promote transparency in land sales by local governments.

What is likely next:

• A property tax–should be part of the policy framework to help 1) alleviate local government reliance on land sales revenue, 2) curb over speculation, and 3) reduce polarization between the rich and the poor. However, there has been little progress due to lack of consensus, and thus we are likely to see an expansion in pilots first (in addition to Shanghai and Chongqing currently) and nationwide legislation later.

• A reform of China’s fiscal system to align a local government’s spending obligations with its income, so as to alleviate local government reliance on land sales revenue.

• More legislation to better protect tenants instead of property owners. Currently, most Chinese still want to own a property instead of renting one, causing much more rigid demand in the property market. While such a policy framework would take years to build, those temporary administrative measures are likely to stay for a while.

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