HomeHealthMedicineChinese Banks’ $178 Billion ‘Medicine’ for Developers Won’t Cure All Ills

Chinese Banks’ $178 Billion ‘Medicine’ for Developers Won’t Cure All Ills

HONG KONG — China’s state-owned banks are showering the country’s real estate developers with loans and other promises of financial aid, steps that will prevent the beleaguered industry from spiraling into full-blown crisis after a wave of defaults.

However, the generous support is unlikely to quickly solve a fundamental problem facing many Chinese developers: a deep slump in new home sales.

In recent days, major Chinese banks said they will provide at least $178 billion in total financial assistance in yuan to selected real estate companies. That includes lines of credit, letters of guarantee and commitments to buy domestic bonds issued by the developers.

The banks’ financial pledges came shortly after China’s central bank and top banking regulator mapped out a list of 16 measures to the country’s ailing housing sectorwhich was reeling from borrowing restrictions imposed on developers and lenders.

The new pledges from state-owned banks, coupled with a recent expansion of a government-sponsored bond guarantee program, are designed to help developers continue their business and complete construction on their projects. The actions would help solve liquidity pressures on real estate companies in the short term, but the much bigger challenge is regaining the trust of ordinary Chinese citizens and homebuyers.

“The most important thing in today’s market is to restore people’s expectations,” said Zhang Yu, chief property analyst at CICC Research. To achieve this, presold homes must first be delivered to buyers. Increased concerns about developer defaults, which caused a negative feedback loop, should also be addressed, he added.

Weak consumer confidence, as China’s economic growth slows and strict Covid-19 restrictions persist, is also weighing on home sales and slow down the pace of people coming together to form new households. Rising numbers of Covid cases in several major cities from Beijing to Guangzhou have brought back widespread lockdowns in recent days.

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“The real sticking point now is the current pandemic situation in China and the zero-Covid strategy,” said Ting Lu, chief economist for China at Nomura in Hong Kong. “As long as that policy is in place, the supportive measures on the funding side are drugs that can relieve symptoms but cannot cure the disease,” said Mr. Lu.

According to data from China’s National Bureau of Statistics, housing sales are the largest source of funding for Chinese developers. Domestic loans accounted for just over 10% of the real estate companies’ total funding.

New home sales in China by value fell 28% in the first 10 months of 2022 from a year earlier, official data showed this month.

The funding support means the “quality developers” who have not yet defaulted are unlikely to default in the coming months, said Shujin Chen, head of China Financial and Property Equity Research at Jefferies. So far, more than 30 developers have defaulted on their dollar-denominated bonds.

She predicted that home sales will fall another 10% next year before a new equilibrium is reached.

Robin Xing,

Morgan Stanleys

China’s chief economist, said new home sales are likely to have bottomed out, but recovery momentum is likely to remain weak in the second quarter of next year.

Just before the recession, Chinese developers were selling about 14 million apartments annually, but part of that was the result of speculative buying, he said.

Mr Xing said he expects sales to eventually top out at around 10 million units a year, which he said would reflect the natural pace of people coming together to form households and urbanization in China.

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Six state-owned banks have announced financing support for the real estate sector.

industrial and commercial bank of China Ltd.

the nation’s largest bank, will provide up to $92 billion in financing to 12 developers, including private real estate giants

Rural garden companies Co.

and

Holdings of the Longfor Group Ltd.

as well as state-backed China Vanke Co. Hong Kong-listed shares of Chinese developers rose on the news.

Under the agreements, the banks will provide financial support to developers for activities such as property development, M&A and domestic bond issuance.

The government-led support shows that “regulators are increasingly concerned about the industry,” said Yao Yu, founder of YY Rating, an independent Chinese credit research firm. He added that it is not clear how much of the banks’ credit quotas – which represent the upper limit of potential financing – will ultimately be paid out to the selected developers.

Several private developers are, too seek guarantees of a government-backed entity, China Bond Insurance Co., to issue yuan-denominated bonds in the domestic market.

On Wednesday, the country’s interbank bond market regulator said the state-backed guarantor had received more than 100 applications from private developers for credit enhancements. So far, a handful of those applications have been approved.

While Chinese developers are unlikely to be able to use their loans from domestic banks to pay off their outstanding international bonds, the prices of some of their dollar bonds have risen higher in recent days. Many are still trading at deeply troubled levels. The yield on an ICE

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BofA

The index of non-investment grade dollar bonds issued by Chinese companies recently stood at 29%, up from around 32% before the announcement of easing measures for real estate.

Brandon Gale, head of the Asia-based financial restructuring group at

Houlihan Lokey,

said the Chinese government’s broader real estate measures have the potential to help stabilize the sector.

That, he added, “could be vital in giving the industry the time it needs to restructure its debt burden.” The American investment bank is financial advisor to

China Evergrande Group,

Sunac China and several other troubled real estate companies.

Write to Rebecca Feng at rebecca.feng@wsj.com

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