Former PBoC Governor proposes to free up 139 billion USD for housing developers liquidity by introducing an insurance mechanism
Former PBoC Governor proposes to free up 139 billion USD for housing developers liquidity by introducing an insurance mechanism
Full-text translation of Yi Gang's presale insurance mechanism aimed at unlocking crucial funds for struggling developers and providing a safety net for distraught property buyers.
Hi, this is Yuxuan Jia from Beijing. On March 7, during the second plenary session of the 14th National Committee of the Chinese People's Political Consultative Conference (CPPCC), Yi Gang, the former Governor of the People's Bank of China and current Deputy Director of the Economic Committee of the CPPCC National Committee put forward four recommendations aimed at enhancing finance with Chinese characteristics. Among these, his proposal to introduce an insurance mechanism for real estate presale funds stood out, potentially freeing up approximately 1 trillion yuan [139 billion U.S. dollars] for immediate utilization by real estate companies, as reported by Bloomberg and Caixin Global.
In China, the housing market predominantly relies on a presale model, allowing developers to charge buyers for properties before their completion. Traditionally, developers have redistributed the proceeds from these sales to other ongoing or future projects. However, the real estate sector's recent downturn has led to reduced funding, resulting in delays and halts in construction.
To counteract this issue, the Chinese government, at both local and central levels, has introduced policies mandating that presale proceeds be deposited in regulatory escrow accounts (预售监管账户), ensuring they're used solely for constructing the specified buildings that the buyers paid for. Though aimed at avoiding delays, this policy significantly strains developers' liquidity by limiting fund reallocation across projects.
Yi Gang proposed to allow real estate companies to access a portion of the regulatory escrow funds and allocate 1% of these funds for preliminary compensation should instances of incomplete construction projects still occur. Yi argues that this approach would help real estate companies overcome financial hurdles and promote a transition to selling properties only upon completion within a three-year framework.
Equally noteworthy are the other recommendations from his speech, such as the suggestion that increases in money supply and aggregate financing should be slightly higher than nominal economic growth to support the real economy. This marks a divergence from the Central Economic Work Conference in December 2023, which demanded the scale of social financing and money supply be kept in line with the expected targets for economic growth and price levels.
The original Chinese version is available on the WeChat blog by the People's Bank of China School of Finance (PBCSF), Tsinghua University.
Staying Committed to the Path of Finance with Chinese Characteristics and Boosting High-Quality Development of the Financial Sector
The Central Financial Work Conference in October 2023 highlighted the high regard of the Communist Party of China (CPC) Central Committee for the financial sector. Subsequently, in January 2024, General Secretary Xi Jinping delivered an important speech at the opening ceremony of a study session on promoting high-quality financial development, attended by principal officials at the provincial and ministerial-level leading officials. In his speech, he comprehensively outlined the defining feature and core elements of socialist finance with Chinese characteristics, establishing a fundamental action guide for promoting high-quality development of the financial sector.
Currently, it is vital to enhance the coordination between financial policies with fiscal policies as well as other policies and to implement targeted measures for certain critical aspects of economic operation.
First, maintain adequate proactive fiscal policy and prudent monetary policy support on the aggregate front.
A proactive fiscal policy should be moderately intensified to improve quality and efficiency, make good use of fiscal policy space, and enhance fund effectiveness and policy outcomes. A variety of monetary policy tools should be applied comprehensively to ensure reasonably ample liquidity. In the current situation, it is necessary to see that increases in money supply and aggregate financing are slightly higher than nominal economic growth to support the real economy. Meanwhile, efforts should be made to address structural bottlenecks and difficulties, with proactive fiscal policies leaning more towards improving people's livelihoods and promoting consumption. Structural monetary policy tools should play a leading role, guiding financial institutions to increase support for small and micro enterprises, green transformation, and consumer spending.
Second, promote an increase in capital investment across society.
There is no shortage of funds in the current market — what is lacking is capital that can bear risks. From the logic of bank lending, if enterprises cannot raise capital, loans will not be issued. It is crucial to place more emphasis on non-governmental capital investment and financing, balance the relationship between primary and secondary markets, explore promoting long-term funds like insurance funds, pension funds, and enterprise annuities into the market, and smooth the financing and exit channels of PE/VC, among others. Moreover, in China's financial landscape, commercial banks hold significant financial capabilities and informational advantages. It is advisable for well-capitalized large banks to choose one or two provincial branches as test sites for pilot programs within their balance sheets. These branches should focus on investing in hard technology startups via debt-equity combination financing, while also being afforded regulatory and assessment flexibility.
Third, establish an insurance mechanism for real estate presale funds, permitting real estate firms to legally and compliantly utilize a portion of the presale regulatory fund balance.
The current policy emphasis should prioritize the primary responsibility of real estate companies, capitalize on the market's critical role in resource allocation, and subsequently ensure the accountability of local governments to better play its role. Priority should be given to assisting the majority of real estate companies, particularly leading private real estate enterprises, in maintaining stable operations and addressing their liquidity challenges. This approach is crucial for ensuring the prompt and high-quality completion and delivery of construction projects to buyers.
「Recommendation:」
An insurance mechanism for real estate presale funds should be established, where the central budget or the People's Bank of China would annually set aside 1% of the regulatory escrow account balance (预售监管账户资金) into a special fund [which Yi describes as 预售保险基金], estimated to be around 10 billion yuan [1.39 billion U.S. dollars] per year. It is proposed to pilot this initiative from 2024 to 2026, amounting to an approximate total of 30 billion yuan [4.17 billion U.S. dollars].
Real estate companies should be authorized to utilize a portion of the regulatory escrow account balance, in line with their corporate governance structures, with approximately 1 trillion yuan [139 billion U.S. dollars] of funds available for immediate use.
In cases where real estate companies face issues with unfinished buildings, the special fund would offer preliminary compensation up to the extent of the funds utilized by the company. This insurance mechanism aims to significantly leverage limited funds to facilitate real estate companies in navigating financial challenges and encourage a shift towards the sale of completed properties over a three-year period.
Meanwhile, special audits on the use of presale funds by real estate companies should be conducted to ensure legal and compliant use.
Fourth, advance the high-level opening up of the financial sector, ensuring China's financial and economic security.
The Central Financial Work Conference required a steady expansion of institutional opening up in the financial sector, so as to attract more foreign financial institutions and long-term capital to invest and operate in China, and create a market-oriented, law-based, and international first-class business environment. Presently, the assets of foreign-owned banks represent approximately 1% of the total banking assets in China. In the stock and bond markets, foreign ownership stands at about 3% each. It is necessary to promote a steady increase in the proportion of foreign investment in banks and capital markets. Meanwhile, active engagement in international financial governance and the development of international financial regulations is crucial. It is essential for China to actively contribute its proposals to relevant international cooperation.
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