The top lawmaking entity of China mentioned that banks should focus on increasing the funding for developers so that the additional risk of defaults could be eliminated along with the completion of pending housing projects
Chinese authorities are preparing to ramp up the pressure on banks in order to end the nation’s property crisis. The leaders are increasing the pressure on Central Banks to close an approximately $446 billion shortfall in funding to calm the sector and deliver millions of apartments that are under construction.
A draft list of nearly 50 developers is being finalized who will receive the financial assistance. The list includes Sion-Ocean Group and Garden Holdings which depicts the intention of the government to help some of the most affected builders. The top lawmaking entity of China mentioned that banks should focus on increasing the funding for developers so that the additional risk of defaults could be eliminated along with the completion of pending housing projects.
Chinese President Xi Jinping is stepping up to invite more support for a broader economy. The decisions that were passed this week increased the urgency to stop the downward flow in the property sector from affecting financial stability and disturbing growth.
Developer shares and bonds have rebounded, but uncertainty looms over whether recent measures can fully restore confidence. Transferring more responsibility to lenders carries risks. China’s colossal $56 trillion banking industry grapples with diminishing margins and rising bad loans as authorities intensify pressure on lenders to support the economy and property sector.
Net interest margins at major state-owned banks hit a record low of 1.74% by mid-2023, falling below the industry’s 1.8% profitability threshold. The sector faces significant setbacks, with a Bloomberg index of Hong Kong-listed Chinese banks plummeting up to 18% this year, while the big four state banks hover near record-low valuations of approximately 0.4 of their book value. This comes after regulators urged banks to cut deposit rates three times and reduced reserve requirements twice this year to boost lending capacity.
Raising funds aims to alleviate households’ “panicked expectations,” according to members of the National People’s Congress standing committee. These comments increase the pressure on the PBOC to further support the property sector.
Steven Leung from UOB Kay Hian likens the funding boost to morphine, providing relief for unfinished projects and alleviating concerns about China’s economic outlook before the upcoming Work Conference. The challenge persists in stabilizing the real estate sector, with Nomura estimating a funding gap of around $446 billion (3.2 trillion yuan) to complete the remaining housing units.
Country Garden, Sino-Ocean, and CIFI Holdings are reportedly on China’s draft list of 50 developers eligible for support. Country Garden’s bonds rallied significantly, and shares jumped in response.
For the latest policies to succeed, authorities must compel banks to comply, says Hao Hong, chief economist at Grow Investment Group. Without mandatory rules, incentives alone may prove ineffective, risking bad loans and accountability.
Previous measures have struggled to reverse the market slump, including mortgage easing, down-payment reductions, tax rebates, and a 200 billion yuan special loan pledge for project delivery.
