China Suspends Funding for Shantytown Overhauls Due to Debt and Property Price Concerns

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One of China’s main policy banks has suspended the provision of funds for the redevelopment of shantytowns, amidst concerns about risk in relation to the rising debt levels of local governments as well as the impact on real estate markets.

A source speaking to Reuters said that China Development Bank has transferred authority for approval of shantytown redevelopment funding from local branches to the lender’s headquarters.

“Authority to approve shantytown redevelopment projects and sign contracts used to be at the branch level…that has all gone back to headquarters now,” said the source.

According to the source CDB is concerned about the debt levels of Chinese local governments, who are the primary recipients of funds for shantytown upgrades.

Containing the debt levels of local government has been one of the key priority areas for Beijing’s ongoing deleveraging campaign.

China’s shantytown redevelopment program kicked off in 2014, with the goal of improving the living conditions of Chinese residents in rural or impoverished areas.

While the program initially involved the construction of new homes by local governments for allocation to shantytown residents, since 2015 monetary compensation has instead been provided, to be used by residents to purchase homes on the market.

Sources said to National Business Daily that this means that the initiative “is no longer a form of shantytown redevelopment,” but is instead serving to drive local real estate prices higher.

Pledged supplementary lending (PSL) from the Chinese central bank is one of the key sources of funding for shantytown upgrades, with funds channelled to CBD by the People’s Bank of China via PSL for subsequent lending to local government.

Local government use the funds to pay compensation to shantytown residents, before using the proceeds from land sales following the dismantling of shantytowns to repay CBD, which then pays back the Chinese central bank.

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