China should establish property presale fund to support developers, former central bank chief says

© Reuters. Governor of the Peoples Bank of China, Yi Gang speaks to the media at the Peterson Institute for International Economics, (PIIE), in Washington, D.C., U.S. April 15, 2023. REUTERS/Ken Cedeno/File photo

BEIJING (Reuters) – China should set up a fund using presale proceeds from residential projects to help property developers with liquidity and ensure they finish construction projects, state media reported Thursday, citing former central bank governor Yi Gang.

In China, developers are allowed to sell residential projects before completion but are required to put those presale funds in escrow accounts. Local city governments permit the developers to withdraw a portion of these funds, depending on the progress of construction.

But as defaults rippled across the sector, many local governments have curbed developers’ withdrawals amid pressure to make sure homes are completed, leaving developers short of cash.

“It’s necessary to focus on supporting the sustained and stable operation of most real estate enterprises, especially top privately owned real estate enterprises, to strive to solve their liquidity difficulties,” state media quoted Yi, deputy head of the economic committee of the Chinese People’s Political Consultative Conference (CPPCC), as saying.

China should support developers to finish the construction of homes and deliver to buyers on time, Yi said at the annual session of China’s top political advisory body CPPCC.

Yi suggested that the government or the central bank can withdraw about 1% of escrow funds each year, or an estimated 10 billion yuan, to inject into the fund. This can be initially conducted during the next three years, Yi added.

Developers can access the fund to ensure home delivery or compensate related parties if they have unfinished projects, said Yi.

In addition, developers should be allowed to access a certain proportion of escrow presale funds in accordance with the law to relax liquidity stress. It is estimated one trillion yuan of escrow proceeds can be immediately used by developers, said Yi.

That would help developers get through difficulties to a certain degree and make a transition to a sales model of mainly selling existing homes during the coming three years, said Yi.