Beijing (TIP) – Any step by China to allow banks to provide unsecured loans to eligible developers “would be a risky move” for the lenders, JPMorgan Chase & Co has said.
Such a measure “would be negative for banks as it would raise concerns about national-service risk and credit risk in the medium term,” the bank’s analysts wrote in a note. The analysts, including Katherine Lei and Karl Chan, added that implementation “would be challenging, as banks could circumvent such guidance due to credit-risk concerns”.
China is considering allowing lenders to issue loans not backed up by collateral to some builders, which could potentially free up capital for debt repayment, Bloomberg News reported on Thursday (Nov 23), citing sources.
Analysts have said that Beijing’s ramping up the pressure on banks to support the struggling real estate sector is a signal that President Xi Jinping’s tolerance for property sector pain is nearing its limit.
The rescue moves are aimed at easing the real estate industry’s cash crunch, sources 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 optimistic take is that if firms like Country Garden Holdings 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 stabilises.
The unprecedented move, part of a package of new measures, are aimed at tackling a crisis marked by numerous defaults and fears of contagion in financial markets. The authorities are reportedly finalising a draft list of 50 developers eligible for financial aid, including Country Garden Holdings 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 per cent on Friday; a broader index of Chinese stocks traded in Hong Kong dropped as much as 1.8 per cent.
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 the 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, but they warned that it may not be sustainable. More liquidity support to private developers may come only selectively and conditionally, they added.
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 this has happened. Banks made 2.4 trillion yuan (S$450 billion) in property development loans in the first three quarters, according to China’s financial regulator. Source: Bloomberg