The Chinese government is boosting efforts to aid real estate developers in an attempt to revive confidence in its ailing property market. Developer stocks and bonds rallied in China this week as the government ramped up pressure on banks to support real estate developers by creating a draft list of companies eligible for bank support and implementing a plan allowing banks to offer the ailing property devlopers unsecured loans for the first time.
These latest moves by the Chinese government are intended to ease the real estate industry’s cash crunch. The government also wants to ensure property developers have enough cash to finish the millions of unfinished homes under construction. Zhongtai Financial International said, “The new round of measures to support the property sector would be powerful to break the vicious cycle of widespread defaults and avoid the spread of systemic risks.”
Over the past year, Chinese authorities have implemented a myriad of measures to stoke demand for homes, including lower down payments and easier mortgage terms. However, the measures have largely failed to revitalize the housing market, with home sales falling in 18 of the past 22 months. Home buyers remain spooked by falling prices, construction delays, and company defaults. The government hopes these latest measures will be enough to bolster consumer confidence and spark some housing demand.
The Chinese government is now prodding the country’s biggest banks to extend more credit and ensure that loan growth to private developers will boost liquidity in the cash-strapped sector. The government hopes that if companies like Country Garden Holdings can use the cash infusion to finish current homes under construction and avoid more headline-grabbing defaults, buyers will regain confidence, and sales will rebound. Banks could even avoid losses if the property sector stabilizes. However, JPMorgan Chase warns that allowing banks to provide unsecured loans to qualified developers “would be a risky move” for the lenders as “it would raise concerns about national service risk and credit risk in the medium term.”
Despite government attempts to rescue the property market, home lending in China remains stagnant. Property loans by Chinese banks in Q3 fell year-on-year for the first time ever. According to China’s financial regulator, banks made 2.4 trillion yuan ($336 billion) in property development loans in the first three quarters of this year. Just completing construction on unfinished homes would require about 3.2 trillion yuan, according to Nomura. Goldman Sachs said the latest measures could lead to only 407 billion yuan of additional loans from banks, well short of funding that goal. TS Lombard said the “recently announced and rumored measures will not be enough to halt the sectoral slowdown” and that lower interest rates and a more expansive funding push are needed.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
