BEIJING (Bloomberg) - China has turned half a trillion dollars of central bank money into bricks and mortar, and there's more to come.
That transformation can be best seen in Heze, a "small" city of about nine million in the province of Shandong. There, the local authorities have ripped down more than a quarter of a million older houses since 2015, some of them traditional-style homes with calligraphy emblazoned above wooden doors, in order to build new ones financed largely by money printed by the People's Bank of China (PBOC).
As part of its efforts to support a slowing economy, the government said this week that it is speeding up the construction of 15 million new homes to replace substandard dwellings nationwide.
That programme has so far pumped 3.2 trillion yuan (S$638 billion) into the economy, by replacing older buildings with shiny new tower blocks.
With US President Donald Trump's trade war battering the economic outlook, the government is pulling multiple levers to lessen the impact on Chinese citizens, as well as softening previous campaigns to reduce debt risk and clean up the financial sector.
Now, by accelerating the so-called shanty-town redevelopment programme while curbing the cash handouts that have accompanied it, the government is trying to boost stimulus while avoiding a bursting of property bubbles nationwide.
"Shanty-town redevelopment is important as this is a key part of domestic demand which is directly controlled by the government," analysts led by Song Yu, chief China economist at Beijing Gao Hua Securities, Goldman Sachs Group's mainland joint-venture partner, wrote in a note.
"There have been a lot of market concerns whether the government would scale back the amount of related investment."
It's hard to overestimate the transforming power of the programme, at least in the places where it has been implemented. It works by using newly-created PBOC yuan to give occupants of old communal housing brand new apartments, cash, or both.
The PBOC prints money, lends it to the China Development Bank, the world's biggest policy bank, via the Pledged Supplementary Lending Facility, which then lends to local government financing vehicles in mostly small cities.
Local governments aim to repay the loans via revenue from land sales or redevelopment.
Heze has demolished more older homes than any other small city in China. One of the city's few other claims to fame is that it is the home town of Peng Liyuan, President Xi Jinping's wife and China's First Lady. There, towers are still rising from the dusty streets and construction is in full swing.
Li Ai'lian is among those who received windfall gains. Last year, she was compensated for her old self-built home with three apartments and 300,000 yuan in cash."This saved me 10 years of hard work," says Li.
"Where we lived before there were muddy roads outside with chickens and ducks running around. It was so dirty."
While the programme has improved the lives of thousands of people like Li and helped boost consumption and growth, it's also fuelled a build-up of debt in many small cities with weak finances.
In Heze, downtown house prices have more than doubled to 8,000 yuan per sq m within about four years, according to Fan Guifang, a saleswoman at property agent Hua Yang Fang Chan in the city.
That's a key reason why Monday's (Oct 8) order to accelerate construction was accompanied by instructions to stop cash payments for resettlement in cities where house prices have surged, and where inventories of empty homes have fallen.
A jump in cash settlements to 56 per cent of China Development Bank's 543 billion yuan of shantytown loans in 2016, from 20 per cent two years earlier, was widely seen to have fuelled home prices in small cities.
Last year, the policy lender began lowering the ratio to curb risks, it said in its annual report.
Managing home prices is not an abstract matter for Xi Jinping's government; it's a matter of social stability. Home buyers angry that apartments are being sold for much less than they paid swamped property developers' marketing offices across China over the Golden Week holiday, demanding their money back.
China economist Lu Ting at Nomura International in Hong Kong likens the cash settlement part of the plan to "helicopter money", a term coined by Milton Friedman to explain how central banks could drop newly printed money from a helicopter to boost prices.
In the decade after the global financial crisis, economists debated whether central banks like the Federal Reserve or the European Central Bank should actually take such a step in order to boost flagging demand.
The programme can't continue indefinitely though, and an eventual tapering is a "big risk" that may trigger growth and financial instability, Lu says.
Markets should be aware that money for the programme may be significantly cut for some cities in the near future, Lu wrote in a note.
Overall, concerns about the outlook for the real estate sector have weighed on the share prices of developers like Country Garden Holdings Co. and China Vanke Co.
Societe Generale SA says how China adjusts the policy will be key to the outlook for the housing market, which UBS AG estimates contributes almost a quarter of final demand in the economy.
The single most important factor for the outlook is when the property market reaches an inflection point, which will be strongly influenced by housing starts in small cities, says Larry Hu, a Hong Kong-based economist at Macquarie Securities Ltd.
China plans to construct 15 million homes under the program over three years from January this year with work already underway on 5.34 million units.
Yu at Beijing Gao Hua says the government has left room "for a potential tweak higher in the target next year."
When Nissan car salesman Cao Zhihui was posted there a year ago, it looked like it was being reconstructed after an earthquake, he said.
All across the city older neighborhoods of traditional housing were flattened or being demolished while in other parts brand new apartment blocks and other infrastructure were under construction.
Heze plans to demolish another 127,000 houses this year and 122,000 more by 2020, says its local government. It received loans under the programme totaling 36 billion yuan in the past two years, almost matching its fiscal revenue of 37.1 billion yuan.
Xu Li, 33, is one of the beneficiaries.
Her family received two three-bedroom apartments about a year ago in return for an old house. Though she says half of her high-school friends have left Heze for cities with better opportunities, she beams with happiness.
"Getting a house is one of life's most difficult things," she said, while playing with her one-year-old daughter in her new apartment complex's play area. "In one swoop all of life's major challenges have been solved."