China’s neighbourhood cash drop pumps $500 billion into economy

Bloomberg

China has turned half a trillion dollars of central bank money into bricks and mortar, and there’s more to come.
That transformation can be best seen in Heze, a ‘small’ city of about nine million in the province of Shandong. There, local authorities have ripped down more than a quarter of a million older houses since 2015, some of them traditional-style homes with calligraphy emblazoned above wooden doors, in order to build new ones financed largely by money printed by the People’s Bank of China.
As part of its efforts to support a slowing economy, the government said this week that it is speeding up the construction of 15 million new homes to replace substandard dwellings nationwide.
That program has so far pumped 3.2 trillion yuan ($463 billion) into the economy, by replacing older buildings with shiny new tower blocks.
With Donald Trump’s trade war battering the economic outlook, the government is pulling multiple levers to lessen the impact on Chinese citizens, as well as softening previous campaigns to reduce debt risk and clean up the financial sector.
Now, by accelerating the so-called shanty-town redevelopment program while curbing the cash handouts that have accompanied it, the government is trying to boost stimulus while avoiding a bursting of property bubbles nationwide.
It’s hard to over-estimate the transforming power of the program, at least in the places where it has been implemented. It works by using newly-created PBOC yuan to give occupants of old communal housing brand-new apartments, cash, or both.
One of the city’s few other claims to fame is that it is the home town of Peng Liyuan, President Xi Jinping’s wife and China’s first lady. There, towers are still rising from the dusty streets and construction is in full swing.
Li Ai’lian is among those who received windfall gains. Last year she was compensated for her old self-built home with three apartments and 300,000 yuan in cash.
While the program has improved the lives of thousands of people like Li and helped boost consumption and growth, it’s also fueled a build up of debt in many small cities with weak finances. In Heze, downtown house prices have more than doubled to 8,000 yuan per square meter within about four years, according to Fan Guifang, a saleswoman at property agent Hua Yang Fang Chan in the city.
A jump in cash settlements to 56 percent of China Development Bank’s 543 billion yuan of shantytown loans in 2016, from 20 percent two years earlier, was widely seen to have fueled home prices in small cities. Last year the policy lender began lowering the ratio to curb risks, it said in its annual report.
China plans to construct 15 million homes under the program over three years from January this year with work already underway on 5.34 million units.
Heze plans to demolish another 127,000 houses this year and 122,000 more by 2020, says its local government. It received loans under the program totaling 36 billion yuan in the past two years, almost matching its fiscal revenue of 37.1 billion yuan.