Central Financial Work Conference aims to prevent major financial risks

The financial risks in China's real estate market are continuously accumulating, which not only affects economic recovery and consumer confidence, but also has long-term implications that could potentially shake the fundamental stability of China's economy. Therefore, the timely convening of the Central Financial Work Conference, which aims to prevent major financial risks, carries great significance.

Real estate has been a pillar industry of China's economy for a long time, capable of effectively driving the development of other industries. It has a significant impact on economic growth, employment, fiscal revenue, household wealth, and financial stability. According to data from the National Bureau of Statistics, in 2022, the combined added value of the construction and real estate industries accounted for 13 percent of the country's GDP. The real estate industry also influences upstream industries such as steel, building materials, construction machinery, and chemicals, as well as downstream industries such as home appliances, furniture, and passenger cars.

Due to the allocation of substantial financial resources to the real estate industry, the linkage between real estate and the financial market has made it possible for real estate risks to be transmitted to the financial market, even triggering a financial crisis. A decline in the real estate market would result in reduced local government revenues, which could further trigger local government debt risks. Therefore, preventing and mitigating real estate risks is a crucial step in addressing major economic and financial risks.

For a long time, real estate companies have primarily achieved their development through "high leverage, high debt, and high turnover." They have heavily relied on continuous and smooth financing and debt instruments. Affected by the pandemic, real estate companies now face significant pressure on cash flow due to hindered sales and collection of payments. Coupled with the impact of real estate regulation policies, the operation of both the financing side and demand side has been disrupted. This puts real estate companies with high debt levels and low cash reserves at greater risk of liquidity and potential disruptions in their funding chains. In the post-pandemic era, loan extensions from banks are no longer sustainable, and financial institutions face the risk of bad debt losses.

Real estate finance is systemic, and the liquidity risks faced by real estate companies can easily translate into operational risks for banking institutions. If not handled properly, this could lead to regional or systemic risks. Leading real estate companies such as Evergrande, Country Garden, and Sunac are all at risk of facing potential crises.

The convening of the 2023 Central Financial Work Conference sends a clear message emphasizing risk management and control. The conference is exploring measures to prevent further expansion of bubbles and resolve potential risks in the real estate market. Additionally, the conference will call for the establishment of a long-term mechanism to stabilize expectations in the real estate market through regulation and control. This includes strengthening land supply and promoting the development of the housing rental market.

Presently, essential tasks involve maintaining stability in the property market, ensuring property delivery, and undertaking real estate enterprise restructuring.

In the short term, we need to adapt strategies according to local conditions and moderately relax controls to promote a smooth transition in the real estate market. The stringent measures previously implemented during the overheating of the real estate market should be adjusted appropriately. Simultaneously, various methods, including loan extensions, debt restructuring, and mergers and acquisitions, should be used to address risks in real estate enterprises and assure housing delivery and market stability through establishing real estate relief funds and debt reorganization industry mergers.

In the long term, our focus should be on constructing a new real estate pattern anchored around urban cluster strategy, household registration reform, and balanced rental and purchase systems. Urban cluster development strategies should be promoted, seeking new growth points in the real estate market amidst population migration and industrial upgrading. A reform in household registration also needs to be undertaken, with adjustments made in the structural supply of land to optimize land resource distribution within urban agglomerations and city clusters. In terms of financial policy, maintaining long-term stability in monetary and real estate financial policies is vital for easing market expectations and supporting the demand for property procurement for essential and improved living. Future adjustments should be oriented towards controlling the financing scales of real estate enterprises. A housing system emphasizing both rental and purchase also needs accelerated promotion.

While strengthening risk management and control, actively boosting confidence in the financial market is an important goal of the Central Financial Work Conference. Through reasonable policy guidance, enhanced regulatory efforts, and market stabilization measures, China is expected to effectively resolve financial risks arising from the real estate and local debt issues, and lay a solid foundation for the stable development of the financial market.

The author Liu Chunsheng is an associate professor at the Beijing-based Central University of Finance and Economics.