(Yicai) June 4 -- Zhejiang has become the first province in China to issue special government bonds for the purpose of buying unsold homes and converting them into affordable housing.

The coastal province sold three bonds worth nearly CNY1.7 billion (USD230 million), with 10-, 20-, and 30-year tenors and paying coupons of 1.73 percent to 2.02 percent, according to an official announcement. The proceeds will be used to buy eight unsold housing projects in the three cities of Huzhou, Jiaxing, and Wenzhou and repurpose them into affordable housing.

To ensure basic living conditions, affordable housing is provided by local governments for low- and middle-income families, new workers, migrant laborers, and others in need. These homes have lower standards and capped prices or rents. Local authorities either build these units themselves or buy them on the market before assigning and managing them according to specific policies.

Since the bonds carry an AAA rating and are backed by the provincial government, they are expected to attract banks and insurance funds. A Shanghai-based insurance fund manager told Yicai that the bonds are very safe and offer ultra-long maturities, catering to long-term investment horizons.

But if other provinces subsequently issue similar bonds, some of the funds that banks allocate to corporate debt may shift, potentially sapping demand for the bonds sold by local authority-backed urban investment companies, according to source at a lender’s investment department.

“Given the pace of new home sales, the severe overhang of unsold completed units in third- and fourth-tier cities will persist,” said Yan Yuejin, vice president of the Shanghai branch of the E-House China Research & Development Institute. “Zhejiang’s approach provides a reference for those cities and others with high inventory levels to speed up the process.”

As of April 30, the ratio of local housing inventory to monthly sales in 64 third- and fourth-tier cities was 30.5 months, according to the institute’s data, implying that it would take more than 30 months to clear existing stocks. 

Editors: Tang Shihua, Futura Costaglione