China widens use of US$1.6 trillion fund to spur spending on homes

[BEIJING] China is mobilising an often overlooked pool of funds worth 10.9 trillion yuan (US$1.6 trillion) to boost a broad range of housing-related consumption, the country’s first policy response after its economic slowdown deepened in July. 

Residents will be able to withdraw their savings in the housing provident fund, a government programme previously used to help people buy homes, for big-ticket spending including renovations, according to a revised regulation taking effect next month. Regulators will also reduce strings attached for residents using savings from the fund on rent payments. 

China will also allow the provident fund’s management centre to purchase policy bank bonds for the first time, in a move to increase its returns.

The revisions came after China’s economy showed across-the-board weakness in July, with consumption softening more than expected and home prices continuing to fall. Many economists estimate that growth slipped further below the government’s annual target, sparking a call from Premier Li Qiang to ramp up supportive measures.

China’s provident fund system, which it adopted from Singapore about three decades ago, requires employees and employers to contribute monthly into a pool that can then give out mortgages, often at a lower interest rate than banks.

With contributions from almost 180 million employers and workers across the country, the fund had 10.9 trillion yuan as of 2024, more than the outstanding amount of mortgage loans, according to the latest official data. 

The latest revision also allows the State Council, or the Cabinet, to solely decide lending rates on mortgage loans given out by the housing provident fund.

Previously, the central bank was designated to propose any rate cuts for such loans subject to approval by the State Council. 

The move “paves the way for more flexible interest-rate adjustments” on the fund, and is “mildly positive” for the housing market, China Index Holdings analysts said in a note late Tuesday. 

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Rates for home loans based on the provident fund are already 0.9 percentage point cheaper than benchmark bank mortgage rates. A rate cut on the fund would help homebuyers reduce the overall mortgage burden, as they are allowed to withdraw savings from the fund to repay bank mortgages. 

The provident fund has become an increasingly important means for homebuyers to obtain financing since last year, as banks turn more cautious with profit challenges. More than 80 local governments this year raised borrowing quotas backed by the fund, according to China Index Holdings. BLOOMBERG