China extends banks’ deadline for capping loans in the real estate sector

The People’s Bank of China will extend a year-end deadline for lenders to cap their share of loans in the property sector, one of Beijing’s strongest moves to ease pressure from the credit crunch plaguing China’s property sector.

The People’s Bank of China’s expansion of the “collective management system for property 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 historic property sector downturn.

Lenders now have more time to limit the ratio of their outstanding real estate loans to total loans at major banks to 40 percent, according to a document signed by the PBoC and the China Banking and Insurance Regulatory Commission and seen by the Financial Times. and their outstanding mortgages as total loans at 32.5 percent.

The extension is the most important in a series of relief measures approved by central bankers and the CBIRC on Nov. 11, according to the document.

“It’s a crucial pivot,” said Yan Yuejin, research director of the E-house China Research and Development Institute, adding that while pressure against over-lending remained, the measures gave commercial banks relief and leeway the granting of new credits.

While some of China’s largest banks have already met the deadline, many mid-market and regional lenders have struggled to scale back real estate lending after years of heavily relying on the sector. Smaller lenders must meet the same requirements, but the ratio varies.

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 are also asking banks to differentiate credit risks between individual projects and developers, as well as 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 hundreds of thousands of Chinese mortgage holders protesting this year over homes they had already paid for because they were not completed.

The package was the latest sign that Beijing was backing down on its sweeping property-sector reforms amid fears of a credit crash and social instability.

The market was stunned by a rising number of defaults and hasty sales of assets by Chinese real estate developers. The pace of China’s new credit 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 the Shenzhen-headquartered property up for sale at an auction price of $1.06 billion.

Pressure on China’s property developers has mounted for several years after financial regulators introduced “three red lines” capping developers’ debt-to-cash, equity and asset ratios in a bid to deleverage the property sector.

However, the severity of the housing 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 financial institutions, which have been heavily exposed to real estate sector lending.

The PBoC and CBIRC did not immediately respond to questions on Sunday.

Additional reporting by Edward White in Seoul and Thomas Hale in Shanghai

https://www.ft.com/content/41ac1669-9f73-4e67-8a9a-3c3e8beb274a China extends banks’ deadline for capping loans in the real estate sector

Adam Bradshaw

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