“My restaurant has been in the red for several years now and I need cash flow, not new debt. Trading my old car for a new luxury electric vehicle was appealing because it would allow me to experience new technology and design, but I don’t want to take on new debt for a new property.”
Chinese authorities expect the scheme to raise trillions of yuan and are doubling subsidies: On May 28, the Ministry of Finance said it would pump an extra 6.4 billion yuan ($883 million) into offering car trade-in subsidies, and earlier this month the Ministry of Transport encouraged the replacement of public buses.
Trade-in programs have already expanded rapidly to many other areas, including home appliances and real estate, but the program is not as large-scale as the first of its kind, implemented in 2009, according to David Wong, a lecturer at the School of Business at Hong Kong Hang Seng University.
“The scale of the trade-in subsidy this time is not as large as that in 2009,” Wong said.
“The final increase in consumer goods retail sales may not be as high as the previous confidence boost.”
Measures to promote the purchase of home appliances have been implemented many times since then, under the pretext of energy conservation and rural living.
While the government may be eager to see the scheme succeed, some analysts warn it could be undermined by the apathy of China’s middle class.
Gavin Chiu, an associate research fellow at the London-based Royal Historical Society, said the current subsidies were expected to have limited impact in the context of the ongoing local debt crisis.
“at that time [2009]”China’s household debt and urbanization were once much lower than they are now, and local government debt situations were also relatively good,” he said.
China’s household debt rose to 64 percent of gross domestic product by the end of March, up from 17.9 percent at the end of 2008, according to data from the China Finance Agency.
“Many households have reported a fall in income. At the same time, Chinese households face a growing need to save for retirement and are becoming increasingly cautious about consumption,” Qiu said.
In particular, efforts to replace small city-centre apartments with larger new homes in the suburbs have stalled.
![There is an oversupply of properties across China, while at the same time, people are reluctant to buy real estate and take on more debt. Photo: Bloomberg](https://cdn.i-scmp.com/sites/default/files/d8/images/canvas/2024/06/13/dfd50200-359f-43b8-a22d-03bebc291458_a66cec46.jpg)
In China, buying property is often seen as an investment. It is often the largest item in a household’s expenditures and can help drive up the prices of big-ticket items such as home appliances, furniture and decoration services.
George Lu, a former foreign executive in Taicang, had once considered selling his 4 million yuan property in the city center to local authorities, but ultimately abandoned the idea after limited options for new housing and the requirement to take out a new 1 million yuan loan.
As of late April, 40 of the first 200 trade-in slots in Taicang had been sold, and more than 300 people had applied for a second round of 800 slots, according to state media reports, although the exact number of transactions was unclear.
“Currently, the volume of transactions through trade-in programs is still very low, while at the same time sales in both the second-hand and new home markets are sluggish,” said Yang Yuejing, director of E-House China Research and Development Institute, a Shanghai-based real estate think tank.
Yang noted that the use of replaced old houses is another challenge for local governments, and the government needs to find practical ways to address this.
The evolution of trade-ins for new homes remains to be seen, and the evidence base of policies so far is far from assuaging younger generations’ concerns about a long-term decline in house prices.
In Zhengzhou, capital of China’s central Henan province, the financial strength of government buyers is in question. Local authorities have set an ambitious target of trading in 10,000 homes at an estimated cost of about 10 billion yuan. But Zhengzhou Urban Development Group, the company in charge of the city’s trade-in program, has reported debts of 118.5 billion yuan by the end of September 2023, state media China News Weekly reported.
According to the National Bureau of Statistics, the price index for new commercial and residential properties in 70 large and medium-sized cities fell 3.1% year-on-year in April.
“We’re still watching to see if home prices will fall further,” said You Qiang, a music teacher in her late 20s who gave birth to her first child last year. She hopes to buy property in the future but is cautious about stretching her finances. [to hold off buying] Not having a stable enough income for the long term future.”
“The number of households willing to take on more debt to buy a new home is very low, especially in tier 3 and 4 cities where there is a large amount of housing stock,” he said.
On the surface, China’s household savings continue to grow: domestic household RMB deposits are set to grow from 71.6 trillion RMB in 2018 to 136.9 trillion RMB in 2023, indicating that the majority of the country’s residents prefer to save rather than spend money.
A quarterly survey released last month by Southwestern University of Finance and Economics in Chengdu, Sichuan province, found that only 6.8 percent of households plan to buy property in the next three months, while 20.1 percent are taking a wait-and-see approach.
“Trade-in programs are targeted at China’s middle class and wealthy because they are the group that can afford to take on more debt, but in reality, this group is facing huge pressure from falling mortgages and incomes,” Qiu said.
“If the trade-in policy fails, Beijing may adopt a more aggressive monetary policy.”