Saturday, November 25, 2023


Beijing is making its biggest move yet to patch up the property crisis threatening to blow up China's economy

Huileng Tan
Thu, November 23, 2023


China's property sector is mired in a debt crisis amid a slump in demand.Zhang Peng/Getty


China is drafting a "white list" of property developers for bank financing, per Bloomberg.


Beijing may let banks offer unsecured short-term loans to the 50 developers on the list.


China's massive property sector is in a slump, adding to the country's post-COVID economic woes.

China's finally starting to do something about the three-year property crisis that's been weighing on its COVID-scarred economy.

Beijing is urging banks to boost financing for property developers, media outlets reported this week.

Authorities may let banks offer unsecured short-term loans to the developers on a "white list" of 50 developers for the first time, Bloomberg reported on Thursday, citing people familiar with the matter. They include embattled real-estate giant Country Garden and state-backed China Vanke.


As developers will not need to provide collateral such as land, property, or other assets to back the loans, this will free up resources for real-estate firms to repay their debt, the unnamed sources told Bloomberg.

If approved, the measures will be the biggest taken by Beijing to address the $3.2 trillion Chinese yuan, or $451 billion, funding gap needed to complete around 20 million incomplete pre-sold units across China, according to Nomura economists earlier this month.

China's real-estate sector has been mired in a crisis since the second half 2021 when a liquidity crisis at Evergrande — once China's second-largest developer — came into public view.

Other Chinese real-estate developers ran into similar issues and began defaulting on their bond payments, spurring fears the crisis could spill over to other sectors in the country and globally.

China's economy is struggling to stage a convincing post-COVID recovery, with youth unemployment hitting a record high earlier this year. China has stopped publishing this data.

While Beijing has been trying to cool speculation in the previously red-hot property market, it's now caught between the sector's slump and reviving its economy because the real-estate market, along with related industries, contributes as much as 30% to the country's GDP.

China has been trying to boost demand for real estate, but there just isn't consumer appetite for spending against the backdrop of economic uncertainty and falling property valuations, wrote Rory Green, the chief China economist at GlobalData TSLombard in a Thursday note seen by BI.

But Green thinks Beijing is finally starting to take its crisis extremely seriously.

"Officials have finally started to show signs of panic, with triggers for greater easing, growth target threat, financial stability and unemployment risks all flashing," he added in his note. "The rhetoric has changed and a number of relatively more aggressive and unusual stimulus measures have come in to play."

Still, not everyone is convinced Beijing's property "white list" will be the solution to China's property problems.

"The White List will probably still fall well short of being White Knight for the property sector that has a plethora of impediments to work through," wrote Vishnu Varathan, the head of Asia economics and strategy at Mizuho Bank in a note on Tuesday seen by Business Insider.

For a start, banks may have concerns about lending to struggling developers, he added.

China's central bank did not immediately respond to a request from BI for comment.


Xi Tolerance for Property Pain Nears Limit as Rescue Emerges

Bloomberg News
Thu, November 23, 2023 










(Bloomberg) -- China is ramping up pressure on banks to support struggling real estate developers, signaling President Xi Jinping’s tolerance for property sector pain is nearing its limit.

Developer stocks and bonds rallied in China this week on bets that authorities may introduce some of the most sweeping measures yet, creating a draft list of firms eligible for bank support while weighing a plan that would allow banks to offer them unsecured loans for the first time.

The moves are aimed at easing the real estate industry’s cash crunch, people familiar with the matter said, underscoring the anxiety among China’s top leadership over the protracted crisis. Beijing also wants to ensure developers have enough cash to finish the millions of homes under construction, even if it means added risks for its banks.

“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,” said May Zhao, head of equity research at Zhongtai Financial International Ltd.

The fresh effort to strengthen developers adds to a slew of moves over the past year mostly aimed at stoking demand for homes, including lower down payments and easier mortgage terms. They’ve largely failed, with home sales plunging in 18 of the past 22 months. Buyers remain on the sidelines, spooked by construction delays, falling prices and company defaults.

Beijing is now setting its sights on the world’s biggest banks, urging them to extend more credit and ensure that loan growth to private developers matches the industry average. The optimistic take is that if firms like Country Garden Holdings Co. can use the cash infusion to finish homes and avoid more headline-grabbing defaults, buyers will regain confidence and sales will rebound. Banks could even avoid losses if the sector stabilizes.

“Developers can survive the downturn if the short-term liquidity issue is resolved,” said Jian Shi Cortesi, a fund manager at GAM Investment Management.

Analysts at JPMorgan Chase & Co. warned 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.”

Beijing’s previous failure to cajole commercial banks means implementation also remains a question mark. And even if it works, some analysts warn the measures still aren’t large enough to meet the challenge of reviving the market.

Banks have been the weak link in China’s rescue attempts so far. Despite government exhortations since late last year for them to lend more, property loans fell year-on-year in the third quarter — the first time that’s ever happened. Banks made 2.4 trillion yuan ($336 billion) in property development loans in the first three quarters, according to China’s financial regulator.

Read more: China Races to End Property Panic, Fill $446 Billion Funding Gap Loans

The slump reflects China’s unruly financial system: even though banks are mostly state-owned, they sometimes put their bottom lines above government priorities. They also struggle to implement conflicting instructions, such as helping the property market and ensuring financial stability.

Bank stocks listed in Hong Kong fell on Friday, with large lenders like Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. down more than 1% each. A gauge of property shares also dropped in the morning session, paring its rally this week to about 14%. A broader benchmark of Chinese stocks listed in Hong Kong slid as much as 1.8%, leading losses in Asia and indicating that optimism spurred by the recent measures may be fading.

“Commercial banks in China, especially the largest ones, are now very cautious,” Li Daokui, a former adviser to the central bank, warned ahead of the latest measures. “When they see signs of deterioration of developers, each commercial bank would automatically shrink from formally committed lending.”

The banks’ record on implementation is also weak. Late last year, they loudly announced huge lines of credit to developers, yet few of them actually materialized, people familiar have said. Lenders also shunned low-cost funding for property loans provided by the central bank since last year.

While some banks took the initiative this week to engage with developers for financing support on certain projects, they remain concerned about whether they’ll be held accountable for any bad debt, bankers with knowledge of the matter said.

The “actual impact is highly relying on banks’ attitudes,” said Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities.

The funding needs are massive. Just completing construction on the unfinished homes would require about 3.2 trillion yuan, Nomura economists wrote in a note this month. The latest measures seem to be short of filling that hole: The property lending targets for banks could lead to just 407 billion yuan of additional loans, Goldman Sachs Group Inc. analyst Shuo Yang said in a note.

“Recently announced and rumoured measures will not be enough to halt the sectoral slowdown,” said Rory Green, chief China economist at TS Lombard. Lower interest rates and a more expansive funding push are needed, he said, and likely to come next year.

To help mitigate risks, officials are weighing a mechanism that would allow one lender to take the lead on supporting a specific distressed builder by coordinating with other creditors on financing plans, people familiar with the matter said.

Soured Loans

Chinese property developers used to rely on selling houses in advance of construction to fund their development, with loans and bond issuance secondary. But that pre-sales funding has dried up for many developers, increasing the need for bank support.

And though the latest moves are aimed in part at stemming defaults, much damage has already been done. About 85% of the offshore property bonds by value are in default or subject to a bond exchange, according to estimates from Goldman Sachs. Some $44 billion in offshore bonds are in default this year alone, based on a tally by Bloomberg.

Another trigger is the worsening housing slump. Sales in 21 major cities fell 44% from their 2019 levels in the early weeks of November, according to data tracked by Nomura Inc., similar to the pace of contraction in July when the government lowered home purchase restrictions. That led to a sales rally in big cities that quickly fizzled out.

Developers’ funding struggles have led to “panicked expectations,” among households, China’s Communist-party controlled parliament said in a meeting last month, urging banks to do more.

Read more: Sweeping Mortgage Boycott Changes the Face of Dissent in China

The slump may have eased the leadership’s concerns about the optics of bailing out property tycoons. Failing to take bolder action could also have political consequences: Households have protested when properties they paid for were left unfinished. The property market troubles are also dragging on economic growth, hitting consumer confidence and contributing to a weak labor market.

“It’s definitely a must to try to save developers,” said Andrew Zhu, Beijing-based fund manager at Hainan Shire Asset Management Co. “When your job is to fight a fire, you don’t have time to worry about whether one or two arsonists got away.”

--With assistance from Shikhar Balwani, Jun Luo, Emma Dong, April Ma, Charlotte Yang, Ishika Mookerjee and Amanda Wang.

(Updates with moves in bank stocks in the 12th paragraph.)

 Bloomberg Businessweek

JPMorgan Says Unsecured Loans to China Developers a ‘Risky Move’

John Cheng
Thu, November 23, 2023 



(Bloomberg) -- Any step by China to allow banks to provide unsecured loans to qualified developers “would be a risky move” for the lenders, according to JPMorgan Chase & Co.

Such a measure “would be negative for banks as it would raise concerns about national service risk and credit risk in the medium term,” analysts including Katherine Lei and Karl Chan wrote in a note. What’s more, implementation “would be challenging, as banks could circumvent such guidance due to credit risk concerns.”

China is considering allowing lenders to issue loans backed up by no collateral to some builders, which could potentially free up capital for debt repayment, Bloomberg News reported on Thursday, citing people familiar with the matter.

The unprecedented move would be part of a package of new measures to ease China’s ongoing property crisis, which has seen numerous defaults and stoked fears of contagion in financial markets. Authorities are also reportedly finalizing a draft list of 50 developers eligible for financial aid that includes Country Garden Holdings Co. and Sino-Ocean Group.

Though the developments sparked a rally in property shares as well as the broader China market on Thursday, stocks fell again on Friday. A Bloomberg Intelligence gauge of developer stocks retreated more than 2% on Friday while a broader index of Chinese stocks traded in Hong Kong dropped as much as 1.8%.

Bank shares have remained under pressure as the latest report adds to investor concerns about their profitability and asset quality. Chinese lenders have been battling with shrinking margins and rising bad loans since they were drafted by authorities to backstop the struggling economy and prevent risk spillover from the sluggish property sector.

The brokerage suggests going long property shares and shorting banks if the report on unsecured loans eventually pans out. Continuous positive news flow may support property shares in the short-term, the analysts said, while warning it may not be sustainable. More liquidity support to private developers may come only selectively and conditionally, they added.

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