(Yicai) March 7 -- Chinese regulators should set up an insurance mechanism for housing pre-sales, which refers to the purchase of properties before they have been built, that will protect the rights of consumers and assist developers with their liquidity issues, the former governor of the People’s Bank of China said at the ongoing Two Sessions, the country’s annual policy meetings.

The central bank should set aside 1 percent of the payments for home pre-sales each year to form an insurance fund that can serve as a guarantee to allow developers to lawfully dip into these pre-sales payments to spend according to pre-determined rules, as well as to protect the rights of consumers should the developer encounter liquidity difficulties that would prevent it from finishing the project, Yi said at the plenary session of the Chinese People's Political Consultative Conference in Beijing yesterday. 

The insurance fund, which is likely to grow to CNY30 billion (USD4.2 billion) by 2026, shall provide the defaulting developer with extra cash to finish the project on time, thereby ensuring the interests of the property buyers, said Yi, who is deputy director of the Committee for Economic Affairs of the CPPCC National Committee and was the governor of the PBOC from March 2018 to July last year.

China allows pre-sales of houses once the development has reached a certain stage of construction. The funds from the pre-sales are required to be used mostly to fund the remaining construction, but regulation was not tight and some aggressive developers tended to spend most of the money bidding for new land to start new projects, increasing their leverage. But, in times of difficulties, they ran the huge risk of financial default, and of not being able to deliver apartments on schedule or not at all.

After several such incidences, the government cracked down, and developers have now lost almost all flexibility to use the pre-sale revenue more efficiently. Yi’s proposal would make it possible for developers to use the funds on alternative projects so long as their spending is strictly monitored and according to certain rules. In the worst-case scenario, should they default, the insurance fund would provide them with enough cash to ensure the on-time delivery of apartments.

The fund could release around CNY1 trillion (USD138.9 billion) to developers and help ease their cash flow difficulties, Yi said.

To ensure the success of the new scheme, regulators should conduct special audits of real estate firms’ use of the payments to make sure the money is being used lawfully, he added.

The country should support the sustainable and stable operations of developers, especially leading private firms, to help them resolve liquidity difficulties so they can finish the construction of the houses smoothly and hand over houses to buyers as scheduled, Yi said.

Editors: Tang Shihua, Kim Taylor