28 October 2016
Home purchase restrictions in Shenzhen will not be removed amid soaring property prices. Photo: Xinhua
Home purchase restrictions in Shenzhen will not be removed amid soaring property prices. Photo: Xinhua

Guangdong reveals plans for supply-side reform

Guangdong, the Chinese province with the highest gross domestic product, has released a report on supply-side reform as part of efforts to eliminate outdated capacity, destock, deleverage, and reduce companies’ operational costs.

By the end of 2018, the southern province plans to shut down all “zombie companies” or those that have high debt burden for years, halted production and survive only on refinancing from banks or government subsidies.

Given Guangdong’s relatively small share of state-backed companies in the economy, it is not too difficult for the province to eliminate outdated capacity.

A tougher issue is destocking, especially in the real estate industry. Guangdong plans to reduce home inventory by 20 million square meters by the end of 2018.

The amount translates to about 12.5 percent of the current home inventory of 1,600 million square meters in the province.

One of the solutions is to promote urbanization and the reform of the house ownership program, encouraging farmers and migrant workers to settle in cities, especially the lower-tiered ones.

The provincial authority is also considering loosening existing restrictions on the purchase of new homes by non-residents, including those from Hong Kong and Macau.

Restrictions already imposed on Shenzhen will not be removed amid soaring home prices.

To deleverage, Guangdong will require brokers, futures players and insurers to lower their leverage ratio to a certain level. Banks will be told to control their bad loan ratio to below the national average level.

The government also plans to roll out incentives to reduce companies’ operational costs. It expects to lower the companies’ comprehensive cost by 5 to 8 percent by the end of 2016, compared with the level in 2014.

Meanwhile, the province proposes to lower the growth rate for the minimum wage, saying it, theoretically, should not surpass the pace of increase in the average salary level in urban areas.

The government must have noticed the big increase in the minimum salary of workers has created large costs for enterprises.

This is a major economic reform for Guangdong in recent years.

Since the plan involves little external factors, Hong Kong companies’ projects in the mainland, or those being done in cooperation with the mainland, are unlikely to be affected.

Hongkongers who love property investment may consider buying new homes in Guangdong, but must carefully select its targets, after the restriction is lifted.

This article appeared in the Hong Kong Economic Journal on Mar. 7.

Translation by Myssie You

[Chinese version 中文版]

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Researcher, China Business Centre of The Hong Kong Polytechnic University

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