China to Use Special Bonds to Purchase Unsold Housing Inventory and Considers Canceling VAT Differences Between Normal and Non-Normal Housing

On October 12, 2024, China’s Ministry of Finance held a press conference outlining policies to support the real estate sector and promote stable economic development. Key takeaways include:

1. China will allow special bonds to be used for land reserves, especially to recover idle land parcels that have been undeveloped by developers for over 2 years. This will help reduce land waste and increase land supply control.

2. The government will support the purchase of unsold commercial housing inventory to convert into affordable housing. Special bonds and affordable housing construction subsidies will be used for this purpose, with less focus on building new affordable units. This aims to absorb excess housing stock and balance housing supply and demand.

3. China is studying the removal of the difference in value-added tax (VAT) standards between normal and non-normal housing. Optimizing related tax policies will help promote a stable and healthy real estate market development.

4. Coordination between fiscal policies and other measures, as well as between central and local governments, will be strengthened to resolutely advance the recovery and stabilization of the real estate market.

Analysts believe these policies lay the groundwork for China’s property sector in 2025. The use of special bonds to acquire unsold housing will accelerate destocking, while the cancellation of the normal/non-normal housing VAT difference is expected to reduce transaction costs, stimulate housing upgrades, and further aid in the recovery of the real estate market.

However, challenges remain in terms of pricing for government purchases of unsold inventory and the subsequent affordable housing provisioning. Finding the right balance to protect state assets while facilitating destocking will be key.

Overall, China’s multipronged approach - controlling new construction, optimizing existing inventory, and improving housing quality - demonstrates its determination to gradually bring the real estate market back to reasonable levels in line with fundamentals. While a return to a booming property market is unlikely, a managed slowdown and soft landing remains the government’s goal.