Why It’s So Hard for China to Fix Its Real Estate Crisis

China’s stock market was plunging and its currency was teetering. The head of the central bank, fielding questions at a rare news conference, said that China would make it easier to get home mortgages.

It was February 2016 and Zhou Xiaochuan, the central bank’s longtime governor at the time, announced what proved to be the start of an extraordinary blitz of lending by China’s immense banking system.

Minimum down payments for buying apartments were reduced, triggering a surge in construction. Vast sums were also lent to local governments, allowing them to splurge on new roads and rail lines. For China, it was a familiar response to economic trouble. Within months, growth started to pick up and financial markets stabilized.

Today, as China faces another period of deep economic uncertainty, policymakers are drawing on elements of its crisis playbook, but with little sign of the same results. It has become considerably harder for China to borrow and invest its way back to economic strength.

On Friday, China’s top financial regulators summoned the leaders of the country’s leading banks and securities firms and urged them to provide more loans and other financial support for the economy — the latest in a series of similar admonitions.

But demand for more borrowing has wilted in recent months, blunting the effectiveness of looser lending policies by the banks.

The construction and sale of new homes has stalled. More than 50 real estate developers have run out of money and defaulted or stopped payment on bonds. The companies have left behind hundreds of thousands of unfinished apartments that many predominantly middle-class families had already purchased, taking out mortgages to do so.

At the same time, companies are wary of borrowing money for expansion as their sales tumble and the economy faces deflation. Local governments across much of China are deeply indebted and struggling even to pay their civil servants. Years of heavy infrastructure investments, followed by huge amounts of spending for mass testing and quarantines during the pandemic, have left China less willing to employ fiscal firepower to jolt demand.

“The traditional way of stimulating the economy, through a credit boom and leveraging, has reached an end,” said Zhu Ning, a deputy dean of the Shanghai Advanced Institute of Finance.

Western economists have long contended that the answer to China’s economic troubles lies in reducing the country’s high rate of savings and investment and encouraging more consumer spending. The World Bank adopted that position in 2005, after China ran into banking troubles in 2003 and 2004 from a previous round of heavy lending.

But China has done little to strengthen its social safety net since then, so that households would not feel a need to save so much money. Government payments to seniors are tiny. Education is increasingly costly. Health care insurance is mostly a municipal government responsibility in China, and high costs for the strict “Covid zero” measures the country employed have nearly bankrupted many local government plans.

During the pandemic, some countries issued coupons for free or discounted restaurant meals and other services to stimulate spending. But while a few Chinese city governments experimented with such steps, the scale was tiny — offering individuals a handful of coupons worth a few dollars apiece.

The idea of using that kind of direct spending on a national scale is opposed within the top reaches of the Chinese government. China relied heavily on food ration coupons starting under Mao and continuing through the early 1990s but today lacks the reliable administrative systems that would be necessary.

China’s top leader, Xi Jinping, has a well-known aversion to any social spending, which he has derided as “welfarism,” that he believes might erode the work ethic of the Chinese people.

“Even in the future, when we have reached a higher level of development and are equipped with more substantial financial resources, we still must not aim too high or go overboard with social security, and steer clear of the idleness-breeding trap of welfarism,” Mr. Xi said in a speech two years ago.

At the core of China’s current economic trouble is real estate, which represents a quarter of the country’s economic output and at least three-fifths of household savings.

When Mr. Zhou, the former central bank chief, unleashed a surge of borrowing in 2016, he triggered a frenzy of apartment construction even in remote cities like Qiqihar, a fading, frozen center of artillery manufacturing near the Siberian frontier. As easy credit sent apartment prices skyward, people in Qiqihar and throughout the country felt richer and flocked to car dealerships and other businesses to spend more money.

Apartments were bought as investments to rent out, including by many Chinese families who saw an opportunity to accumulate wealth. But as more and more apartments were built, their value as rentals declined. Investors were left with apartments whose rent wouldn’t pay for their mortgages. In many cities, annual rent has been 1.5 percent or less of an apartment’s purchase price, while mortgage interest costs have been 5 or 6 percent.

Apartments in China are commonly delivered by builders without amenities like sinks and washing machines, or even basics like closets or flooring. Because rents are so low, many investors have not bothered to finish apartments over the past decade, holding newly built but hollow shells in the expectation of flipping them for ever-higher prices. By some estimates, Chinese cities now have 65 million to 80 million empty apartments.

Demand for new apartments has now plummeted, leaving little expectation that a repeat of Mr. Zhou’s measures in 2016 would quickly revive the market. The annual number of births and marriages has almost halved since 2016, eroding much of the need for people to buy new apartments.

Prices for existing homes have fallen 14 percent in the past 24 months. Prices of new homes have not fallen as much, but only because local governments have told developers not to cut prices drastically. Sales of new homes have plunged as a result.

Many economists in China now suggest that the country needs to go beyond reductions in down payments and also cut interest rates sharply, going far beyond a tiny interest rate reduction on Monday. Deep cuts in interest rates would make it much cheaper to borrow money for a new home, car or other big purchases. It could also spur more exports, long a driver of the Chinese economy.

A risk of cutting interest rates is that Chinese companies and families would be able to earn much higher interest rates on bank deposits in other countries, and would try to transfer large sums of money out of China. That would cause China’s currency, the renminbi, to sink against the dollar, which would also make Chinese exports more competitive in foreign markets.

China cannot export its way out of economic trouble without incurring considerable hostility from governments in Europe, the United States and developing countries, which have become increasingly reluctant to accept job losses associated with a dependence on imports. But that may be a risk that China is willing to take as pressure increases for further interest rate cuts.

“Cutting interest rates is necessary,” said Xu Sitao, the chief economist in the Beijing office of Deloitte. “It is about stabilizing the property sector and offering calibrated relief to companies and local governments that are experiencing financing woes.”

Li You contributed research.