Deleveraging steps in China's real estate market should be prudent

China should tackle the problem of high leverage in the real estate market step by step to maintain stable and sound market operations rather than demanding instant success in solving the problem.

Over a period of time in the past, some property developers borrowed blindly and their leverage ratios increased to excessive levels. If they continue to develop this way, potential risks will keep rising. Therefore, regulators launched a series of policies in recent years to reduce debt levels, which is necessary in general.

However, the current problem is that during the process of deleveraging through policy adjustments, the financial environment grew tighter, market expectations turned negative and potential risks were made explicit. This is heading in the opposite direction of regulatory objectives.

This year, bank lending to the real estate sector was strictly regulated. Direct financing for the sector shrank rapidly in a short period and off-balance-sheet financing continuously fell. The decline in property transactions led to a quick reduction in sales revenue. Such a financing environment is unbearable even for the soundest industry. So the key is to maintain a stabilized financial environment during the process of further promoting financial leverage governance, while guiding the formation of reasonable market expectations and keeping them stable.

When China is dealing with the problem of high gearing ratios, regulators should not expect to make significant progress within a short time frame. Instead, the task should be carried forward in stages over a period of time.

It is true that leaving the problem of high leveraging unsolved will lead to tremendous hidden dangers and risks. But if regulators are eager to achieve quick results, their radical moves will cause the financial environment for the real estate industry to worsen rapidly and the industry's liquidity to shrink sharply and quickly. This will result in the outbreak of additional risks.

Policymakers should attach great importance to the role and functions of the real estate market in the Chinese economy. Although China can reduce its economic reliance on the property sector through further adjustments of policies in the future, it is hard to completely end such a reliance. In a word, the real estate industry will remain as one of the most important industries in the nation. This will have a series of effects on investment and consumption.

Recent remarks made by high-level officials and the People's Bank of China, the nation's central bank, are intended to dispel excessive worry over the real estate market in the short term and maintain stable and sound development of the housing industry in the long run. The financing environment for property developers will hopefully improve slightly. Recent market changes showed that banks' willingness to issue loans for real estate development and mortgage loans has increased.

Next, China should moderately adjust policies on equity financing, bond financing and off-balance-sheet financing to create a proper direct financing environment for healthy property developers.

Real estate regulatory policies differ among cities. In some cities, however, local regulatory policies are not good for maintaining stable and sound development of the housing market.

As property developers will have a cautious attitude toward land purchasing going forward, the national land area purchased may decrease by 7 percent on a yearly basis next year.

In 2022, the growth of real estate investment may stay at a relatively low level. Investment in real estate development is expected to reach about 16.05 trillion yuan ($2.5 trillion), with a nominal growth rate of 6.6 percent year-on-year and a two-year average growth rate of 6.5 percent.

Considering that the growth of real estate investment may slow down further, it will have a negative impact on overall investment and consumption.

If real estate investment growth in 2022 is roughly the same as that in 2019, the growth in the contribution of real estate investment to China's GDP will be 0.3 percentage point less year-on-year. The growth in its contribution to fixed asset investment will be 1 percentage point less and to consumption 0.5 percentage point lower.

Although it is necessary for China to remain the same in terms of standardizing regulation, the country should improve its financial environment and adjust real estate regulation policies toward a moderate trend.

Against the backdrop of new urbanization, the real estate sector still has tremendous room for development. Financial institutions should meet the reasonable financing needs of quality property developers and residents' rigid demand, as well as their need for upgraded dwellings, and these institutions should also provide reasonable financial support based on managed risk control.

I would advise financial institutions to implement different housing credit policies in accordance with local conditions in different cities, maintain stable operations of real estate development loans and mortgage loans, and avoid blindly recovering loans before maturity or cutting off lending to property developers due to panic behavior.

In addition, property developers should make reasonable arrangements concerning business and financing activities to improve their risk resistance capacity.

Looking ahead, people should not hold a pessimistic attitude toward China's real estate market in the medium and long terms. One of the reasons is that China's new urbanization plan will boost demand for housing.

It is estimated that the nation's urbanization rate may reach 70 to 75 percent by 2035, which means its floating population will increase by 70 million to 110 million in the next 14 years, and the population of its urban areas will increase by 150 million to 210 million.

Although the population of small and medium-sized cities will be falling gradually, we are seeing further inflows of people to major cities where demand for housing is still quite strong.

Among the floating population of migrant laborers, those who own a home in their city of residence accounted for nearly 30 percent of the total. About 25 percent of the rest have the intention to live in their city of residence for an extended period. With continuous development of urbanization in China, the floating population will further increase and the demand for housing in urban areas will grow accordingly.

Taking the long view, China should adopt policies that will improve the allocation efficiency of real estate market resources. My advice includes further reducing unreasonable barriers preventing the free movement of workers, moderately raising the upper limit for population in big cities, promoting the transition of existing commercial land into residential land, exploring cross-regional transactions of land quotas to solve the problem of the inadequacy of land quotas in major cities and increasing financial support for affordable rental housing.

The writer is chief economist of Zhixin Investment, president of the Zhixin Investment Research Institute and president of the China Chief Economist Forum.

The views don't necessarily reflect those of China Daily.