Bad news keeps piling up for mainland property developers. Just when ratings agency Moody's downgraded the sector's outlook from stable to negative, news came that the National Development and Reform Commission was planning to allow some local governments to issue bonds directly.
Banned from issuing their own debt, local governments have long relied on land sales to make up revenue. This has led to cosy and often corrupt relationships between officials and developers. Their expropriation of land from farmers and villagers without sufficient compensation has fuelled social tensions and conflict. A huge shadow financial sector with investment vehicles designed to circumvent the restriction has also developed and now threatens the stability of the economic system.
The bond-issuing programme will be slow to roll out. Initially, only 10 local governments will be allowed in on the experiment and the amounts will be restricted. But it is at least a baby step towards putting local public finance on a sounder footing. However, it does not augur well for the property market, at least in the short term. Housing inventory is at a 14-month high; liquidity has dried up, especially for smaller developers. Home-price rises in major cities have slowed or even reversed. Coupled with the frantic pace with which many developers have issued a record amount of debt since last year, many analysts have warned of a bubble bursting.
That hasn't happened yet, but the bubble is already deflating. The last time China had a major property collapse was in 1992-93. Afterwards, the mainland's property market enjoyed a long boom.
The commission - the mainland's top economic planning agency - which announced the bond initiative, has vowed to stay focused on reforms despite some signs that the central government's enthusiasm for bringing about painful change may be ebbing as the mainland economy stumbles. Lenders, for example, have been instructed to speed up issuing mortgage approvals as a measure to slow down property market reverses.
The case for investing in the property market still holds as China's urbanisation gains pace. The demand for housing will continue to rise. But it will be a roller-coaster ride, as economic planners appear to be in two minds about allowing the correction in the property sector to continue as part of their broader market reforms or propping it up to prevent fallout.