China is considering a proposal to have local governments across the country buy millions of unsold homes, people familiar with the matter said, in what would be one of its most ambitious attempts yet to salvage the beleaguered property market.

The State Council is seeking feedback from several provinces and government entities on the preliminary plan, said the people, asking not to be identified discussing a private matter. While China has already experimented with several pilot programs to clear excess housing inventory with the help of state funding, the latest plan would be much larger in scale.

Local state-owned enterprises would be asked to help purchase unsold homes from distressed developers at steep discounts using loans provided by state banks, according to two of the people. Many of the properties would then be converted into affordable housing. 

Officials are still debating details of the plan and its feasibility, the people said, adding that it could take months to be finalized if China’s leaders decide to go ahead. The housing ministry didn’t respond to a request for comment.

If authorities do proceed, it would mark a new phase in the government’s closely watched campaign to address the biggest drag on the world’s second-largest economy. China’s home sales plummeted about 47% in the first fourth months and unsold housing inventory is hovering at an eight-year high, exacerbating a meltdown that threatens to put about 5 million people at risk of unemployment or reduced incomes. 

The plan can “inject liquidity to developers directly and improve their financial situation, as well as immediately digesting excess inventory,” said Raymond Cheng, head of China property research at CGS International Securities HK. “This is all win situation. Of course, it needs a lot of funds - at least 1 trillion yuan to make the impact more meaningful.”

Shujin Chen, head of China financial and property research at Jefferies Financial Group, estimated at least 2 trillion yuan (US$277 billion) of investments would be needed.

Investors have been awaiting details of the government’s next moves after the ruling Communist Party on April 30 vowed to explore new approaches to ease the real estate crisis. The Politburo, composed of China’s 24 most-senior leaders, said the country was studying ways to “digest” the existing stockpile of homes.

The CSI 300 Real Estate Index, which tracks seven mainland-listed major developers, jumped 5 per cent after the report. Offshore yuan and Australian dollar edged higher. The Hong Kong stock exchange, where most private developers are traded, is closed for a holiday. 

While Beijing has experimented in the past with state buying of unsold apartments, most smaller-scale initiatives have met with little success. 

In early 2023, the People’s Bank of China made 100 billion yuan available to some financial institutions through a specialized lending facility. The money was meant to help eight cities on a trial basis buy unsold properties for use in local subsidized rental programs.

The Economic Observer newspaper reported in January this year that cities including Qingdao and Fuzhou had started using those funds to buy apartments. Still, only 2 billion yuan was extended under the program as of March, the central bank’s latest quarterly data showed, implying caution among banks and local authorities. 

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Since the Politburo meeting last month, several major cities including Hangzhou, the homebase to Alibaba Group Holding Ltd., scrapped all their remaining curbs on residential purchases to lift transactions. 

Meanwhile, more than 50 Chinese cities rolled out “trade-in” programs that offer residents incentives for selling their old homes and upgrading to new properties as part of efforts to boost housing demand. Among them 11 local government or city-backed entities are conducting trials of buying housing inventory, according to a note from Tianfeng Securities Co. this week.

Not Enough

Even so, China’s property sector is unlikely to stabilize until the gap between housing supply and demand closes, according to Bloomberg Economics.

Unsold housing inventory climbed to 3.6 billion square feet last year, the highest since 2016, official data showed. It will cost at least 7 trillion yuan, or 78 per cent of China’s budget deficit this year, for the government to absorb the inventory in 18 months, Tianfeng Securities estimated.

The new plan to enlist local governments to reduce housing glut could further exacerbate their debt level, which has soared to 56 per cent of gross domestic product as of last year. Banks would also be under pressure as their balance sheets have already been eroded by rising bad loans and narrowing margins.