China is increasing pressure on banks to support struggling property developers, signaling that President Xi Jinping’s tolerance for suffering in the sector is reaching its limit. This week, shares and bonds of brick companies rose in China, on expectations that the authorities could implement more ambitious measures. This includes creating a preliminary list of companies eligible for bank support, while considering the possibility of allowing banks to provide collateral-free loans to these developers for the first time.
These moves seek to ease the cash crunch in the real estate industry, underscoring concern among top Chinese leaders over the prolonged crisis. Beijing is also seeking to ensure real estate companies have enough cash to complete the millions of homes under construction, even if this means greater risks for banks.
“Further support measures for the real estate sector would be crucial to breaking the cycle of widespread defaults and preventing the spread of systemic risks,” said May Zhao, head of equity research at Zhongtai Financial International Ltd.
This additional effort to strengthen developers comes in addition to a series of actions over the last year, mostly focused on stimulating demand for housing. However, these actions have had limited success, with home sales declining in 18 of the last 22 months. Buyers remain on the sidelines, worried about construction delays, falling prices and non-payments at these types of companies.
Now, Beijing is pressuring major banks to provide more credit and ensure that financing to private real estate companies is consistent with the industry average. The hope is that if companies like Country Garden Holdings Co. can use this additional liquidity to finish half-finished homes and avoid new debt defaults that generate headlines, buyers can regain confidence and sales will rebound. Even banks could avoid losses if the sector stabilizes.
“You need to try to save the real estate developers. When you’re putting out a fire, you don’t have time to worry about whether one or two arsonists managed to escape.”
“Developers can withstand the slowdown if the short-term liquidity problem is resolved,” said Jian Shi Cortesi, fund manager at GAM Investment Management. Despite this, analysts at JPMorgan Chase & Co. warned that allowing banks to make collateral-free loans to qualified developers “would be a risky move” due to concerns about domestic and medium-term risks for lenders.
China’s previous track record in persuading commercial banks raises uncertainties about the effective implementation of these measures. Furthermore, even if successful, some analysts believe the measures are still not robust enough to fully address the challenge of revitalizing the market. So far, banks have been the weak link in China’s real estate rescue attempts after almost two years of problems with brick debt.
Despite government pressure to increase lending since the end of last year, real estate lending decreased year-over-year in the third quarter, an unprecedented situation. According to China’s financial regulator, banks provided 2.4 trillion yuan (€310 billion) in loans for real estate development in the first three quarters.
This decline reflects the complexity of China’s financial system: although most banks are state-owned, they sometimes prioritize their profits over government priorities. In addition, facing difficulties in complying with contradictory instructions, such as supporting the real estate market and guaranteeing financial stability.
In response to these moves, banking stocks in Hong Kong fell, with large lenders such as Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp down more than 1%. An index of real estate stocks also posted losses, reducing its weekly gain to about 14%. A broader index of Chinese shares in Hong Kong fell as much as 1.8%, leading losses in Asia and suggesting the recent upbeat moves may be waning.
The ball, on the roof of the banks.
“Commercial banks in China, especially the largest ones, are now very cautious,” Li Daokui, a former adviser to the Chinese central bank, warned before the latest measures. “When they detect signs of deterioration in the promoters, each commercial bank will automatically back out of the formally committed loans.” Effective implementation of these measures poses challenges.
Late last year, despite announcing large lines of credit for developers, few of these loans materialized, according to people close to the matter. Lenders also avoided low-cost financing for property loans provided by the central bank from 2022.
Although some banks took the initiative this week to collaborate with developers on certain projects, they remain concerned about whether they will be responsible for any bad debts, according to bankers consulted by Bloomberg. “The actual impact will largely depend on the banks’ attitudes,” said Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities.
The financing needs are enormous. Just completing construction of the pending homes would require about 3.2 trillion yuan, according to Nomura economists in a note this month. However, the latest measures appear not to be enough to cover that shortfall: The real estate lending targets could result in just 407 billion yuan in additional loans, according to Goldman Sachs Group Inc. analyst Shuo Yang.
“Recently announced measures and rumors will not be enough to stop the sector’s slowdown,” said Rory Green, chief China economist at TS Lombard. Lower interest rates and a broader funding push are needed, which is likely to happen next year.
To help mitigate risks, officials are considering a mechanism that would allow a lender to lead support for a specific struggling builder to coordinate with other creditors on financing plans, according to people familiar with the matter.
Problematic loans
Previously, Chinese real estate developers used to rely on the pre-sale of homes to finance their development, relegating loans and bond issuance to the background. However, this pre-construction financing has dried up for many developers, increasing the need for bank support.
Although the most recent moves seek to curb defaults in part, much of the damage has already been done. According to Goldman Sachs estimates, around 85% of offshore real estate bonds (in currencies outside of China) by value are in default or subject to a bond swap. This year alone, some €40 billion in offshore bonds are in default, according to Bloomberg data.
Another alarm signal is the intensification of the recession in the real estate market. Sales in 21 major cities have fallen 44% from 2019 levels in the first weeks of November, according to data from Nomura Inc. This pace of contraction is similar to that seen in July, when the government eased home-buying restrictions. . While this initially led to a rebound in sales in larger cities, this recovery was short-lived.
Developers’ financial difficulties have raised “worrying expectations” among households, China’s Communist Party-controlled parliament reported at a meeting last month, urging banks to step up their efforts.
The current recession may have eased leadership concerns about the perception of bailing out real estate moguls. However, failure to take bolder action could have political consequences: households have protested when properties they paid for were left unfinished.
In addition, housing market problems are affecting economic growth, undermining consumer confidence and contributing to a weak labor market. “There’s definitely a need to try to save property developers,” said Andrew Zhu, a Beijing-based fund manager at Hainan Shire Asset Management Co. “When you’re putting out a fire, you don’t have time to worry about whether one or two arsonists managed to escape.” “
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