By Koh Gui Qing

BEIJING (Reuters) - Dismayed by the millions of unsold homes in China's troubled real estate market, the Chinese government is taking matters into its own hands: by buying some properties and turning them into public housing. Like a white knight riding to the rescue of distressed developers, a handful of local governments are snapping up thousands of empty homes at hefty discounts and re-selling them to the country's poorest households.

This cannot be a cure-all for China's huge supply overhang. At the end of May, according to the National Bureau of Statistics, unsold residential floor space totaled 657 square kilometers - the most unsold space in at least two years, and covering an area nearly the size of Singapore.

Still, the policy getting tested in at least six provinces looks like a win for all. Low-income households gain from a bigger supply of subsidized homes, the government boosts its poverty alleviation work, developers deplete an oversupply of houses that has dampened prices, and crucially, China's cooling economy gets a fillip from a healthier property market.

All of this comes with a caveat: government purchases of homes - done with discounts averaging between 10 percent and 52 percent - add to a mountain of public debt and do little to discourage the next housing bubble. But the potential benefits are alluring, leading authorities in some of China's worst-performing property markets to experiment with mass purchases of homes.

'GHOST CITY' MOVEMENT In the Inner Mongolia city of Erdos, notorious as a "ghost city" after a building frenzy failed to attract buyers and residents, authorities in Dongsheng district bought houses in April and May.

Online documents showed authorities, through tenders, bought 3,660 housing units from eight developments in May for between 2,766 yuan to 3,612 yuan ($446 to $582) a square meter. "We will watch the situation in the (housing) supply," said an official at the Dongsheng housing authority who declined to be named. "If there is a need, we will buy again."

Repeated phone calls to the Erdos government went unanswered

The government's foray comes at a time China's struggling housing market appears to be stabilizing. New home prices edged up for the first time in 13 months in May, suggesting the property market may be bottoming out.

"If the inventory can be gotten rid of more quickly, it will ease the stress on developers' funding," said Zhu Jianfang, the chief economist at CITIC Securities.

TOO MANY HOMES, TOO FEW BUYERS

In Erdos, a coal town battered when a stuttering world economy dented coal prices <GCLNWCWIDX>, pain was compounded by its housing market, where a supply glut led the mayor to call for a three-year halt in construction last year.

New housing space completed in Inner Mongolia last year was 24 percent less than in 2013, the second-biggest decline among China's 31 provinces and regions, the Chinese Academy of Social Sciences, a state think-tank, said in May.

"It helps to run down the inventory, but not by much," a broker surnamed Hua said of the government's purchases.

Analysts warn against betting on a dramatic turnaround.

Developers do not want to slash their profit margins by selling houses to the government at discounts of up to 52 percent - the figure in Inner Mongolia - unless they have to.

"If the market has enough buying power then we would sell to the market," said an official from a developer that sold homes to the government recently.

"But the market's buying power has weakened by too much. My feeling is that most part of the housing inventory has not been digested," he said.

($1 = 6.21 Chinese yuan)





(Reporting by Beijing Newsroom and Koh Gui Qing; Editing by Richard Borsuk)