Can China’s Recent Initiatives Stabilize its Real Estate Sector?

China's Property

In a bid to restore confidence in its struggling property market, the Chinese government is intensifying efforts to assist real estate developers. This week, developer stocks and bonds in China experienced a rally following government directives that increased pressure on banks to back real estate developers. The government has taken significant steps, including drafting a list of eligible companies for bank support and allowing banks to provide unsecured loans to distressed property developers for the first time.

The primary objective of these measures is to alleviate the cash crunch in the real estate industry and ensure that developers have sufficient funds to complete the construction of millions of unfinished homes. Zhongtai Financial International commented, stating that these measures could break the cycle of widespread defaults and prevent the escalation of systemic risks.

Over the past year, Chinese authorities have implemented various measures to stimulate demand for homes, such as reducing down payments and easing mortgage terms. However, these efforts have not succeeded in revitalizing the housing market, with home sales declining in 18 of the past 22 months. Homebuyers remain cautious due to falling prices, construction delays, and company defaults. The government hopes that the latest measures will boost consumer confidence and stimulate housing demand.

The Chinese government is now encouraging major banks to extend more credit, aiming to enhance liquidity in the cash-strapped sector by facilitating loan growth to private developers. The hope is that with increased cash flow, companies like Country Garden Holdings can complete ongoing construction projects, prevent further defaults, and restore buyer confidence, leading to a rebound in sales. However, JPMorgan Chase warns that allowing banks to provide unsecured loans to qualified developers poses risks, raising concerns about national service risk and credit risk in the medium term.

Despite the government’s attempts to rescue the property market, home lending in China remains stagnant. Property loans by Chinese banks in Q3 witnessed a year-on-year decline for the first time ever. According to China’s financial regulator, banks provided 2.4 trillion yuan ($336 billion) in property development loans in the first three quarters of the year. However, completing construction on unfinished homes would require approximately 3.2 trillion yuan, according to Nomura. Goldman Sachs suggests that the latest measures may only lead to an additional 407 billion yuan in loans from banks, falling significantly short of the funding needed to achieve the goal. TS Lombard asserts that the recently announced and rumored measures will not be sufficient to halt the sectoral slowdown, emphasizing the necessity of lower interest rates and a more expansive funding approach.

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