Shares in Chinese real estate companies rose sharply on Monday as a 16-point plan to support the indebted sector was interpreted by Beijing as a key pivot that could spark a revival.
The Hang Seng Mainland Properties Index rose as much as 16.3 percent Monday morning. Hong Kong-listed Country Garden, one of China’s largest developers, rose more than 36 percent. The benchmark Shanghai Composite Index rose 0.8 percent, while the Hang Seng gained 3.3 percent.
Among the measures outlined in a policy document from the central bank and banking regulators is extending a year-end deadline for lenders to cap their share of loans in the real estate sector, one of Beijing’s strongest moves to ease pressure from the credit crunch the industry.
The People’s Bank of China’s expansion of the “collective management system for real estate loans” has the potential to affect 26 percent of China’s total bank lending, giving lenders and cash-strapped real estate developers breathing space as they struggle to survive a huge sector downturn.
According to the document signed by the PBoC and the China Banking and Insurance Regulatory Commission and seen by the Financial Times, lenders now have an undetermined amount of time to limit the share of their outstanding real estate loans at major banks to 40 percent of total loans and their outstanding mortgages 32.5 percent.
The extension beyond December 31 is the most important in a series of 16 relief measures approved by central bankers and the CBIRC on November 11, according to the document.
“It’s a crucial lynchpin,” said Yan Yuejin, research director of the E-house China Research and Development Institute, adding that while the pressure on excessive lending persisted, the measures gave commercial banks relief and leeway the granting of new credits.
They also come after the expansion of a key funding support program that could help developers sell more bonds and ease their liquidity woes. “Coupled with earlier support for the Rmb 250 billion (US$35 billion) bond sale program, we believe this could mark a game-changer for the real estate sector as the government decides to support developers in addition to supporting the industry support,” said UBS analysts in a statement.
Analysts at Nomura wrote, “Money-strapped developers (particularly private), home builders, mortgagors and other related stakeholders can now breathe a sigh of relief.”
Outstanding bank loans and developer loans from trust funds that are due within the next six months can be extended by a year, the document showed.
Regulators have asked banks to differentiate between project and developer credit risk and negotiate with homebuyers to extend mortgage repayments and protect credit ratings. Lenders are also encouraged to raise funds to buy up unfinished projects and convert them into affordable rental homes, the document showed.
These steps are intended to keep credit lines open for real estate groups and allow them to complete incomplete developments. They come amid protests by hundreds of thousands of Chinese mortgage holders over homes they had already paid for but left unfinished.
The package is the latest sign that Beijing is backing down on its sweeping property-sector reforms amid fears of a credit crash and social instability.
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The Chinese market has been stunned by a rising number of defaults and hasty asset sales by developers. The pace of new lending and overall social finance has slowed faster than expected amid sluggish demand.
Evergrande, China’s most indebted developer with about $300 billion in debt, suffered a $770 million loss last week after forced selling one of its most valuable assets. It also plans to put its Shenzhen headquarters up for sale with a starting price of $1.06 billion.
Pressure on China’s real estate developers has increased in recent years after financial regulators introduced “three red lines” capping developers’ debt-to-cash, equity and asset ratios in a bid to deleverage the real estate sector.
However, the severity of the real estate downturn has raised fears of a generational slowdown in China’s economic growth. And it has increased the risk of contagion to China’s local government financial institutions, which have been heavily exposed to real estate sector lending.
The PBoC and CBIRC did not immediately respond to requests for comment.
Additional reporting by Edward White in Seoul and Thomas Hale in Shanghai