China goes on a $1 trillion apartment-buying spree

China's national team is going house hunting. State-owned enterprises and local governments are answering Beijing’s call to purchase the country's vast swathe of unsold apartments. That should help put a floor on plunging property prices.

Local authorities in Hangzhou, home to corporate titans Alibaba and Geely Automobile kicked off the bold initiative by announcing they will buy up to 100,000 square feet of apartments in Linan district at market prices and rent them out at affordable rates. Other regions are set to follow: the ruling Politburo in April called for a nationwide effort to reduce housing inventory. China's cabinet, the State Council, is also considering a proposal that would see local governments and state-owned enterprises buying unsold homes from distressed developers using loans from state lenders, Bloomberg reported on Wednesday, citing sources.

It's an ambitious undertaking that represents a shift from earlier piecemeal efforts to prop up housing prices. Those included targeted financial support to a "whitelist" of property projects. As of the end of last year, China had a combined floor area of unsold homes of up to 3.6 billion square feet, per official data. Analysts at Tianfeng Securities estimate it will cost 7 trillion yuan, or nearly $1 trillion, to buy the entire stock.

A man walks on a scaffolding at the construction site of the Beijing Xishan Palace apartment complex developed by Kaisa Group Holdings Ltd in Beijing. — Reuters

Notable beneficiaries include the cash-strapped Country Garden, the country's largest private developer which is facing a liquidation petition from creditors on Friday, as well as Agile Group, which earlier this week defaulted on its US dollar bond. Hong Kong's Hang Seng Mainland Properties Index rallied nearly 6% on Thursday.

The risk is that local governments are already sitting on 110 trillion yuan of debt, estimates the IMF. SOEs like China Resources Land are also grappling with a slowing economy and will be pushed to take on less profitable public housing projects, straining balance sheets even more. The central government, for its part, is set to issue 1 trillion yuan worth of long-term sovereign bonds. That may not be enough. Rebuilding confidence in the property market will come at a huge cost. — Reuters