China Weighs Unprecedented Builder Support With First-Ever Unsecured Loans

(Bloomberg) -- China may allow banks to offer unsecured short-term loans to qualified developers for the first time, people familiar with the matter said, a major push to ease the property crisis that's dragging down growth in the world's second-largest economy.

As part of a package of new measures to backstop the real estate industry, regulators are considering allowing banks to issue so-called working capital loans to some developers, the people said, asking not to be identified discussing a private matter. Unlike other types of loans available to builders that typically require land or assets as collateral, the new financing facility would be unsecured and available for day-to-day operational purposes, potentially freeing up capital for debt repayment, the people said.

Officials are also weighing a mechanism that would allow one lender to take the lead on supporting a specific distressed builder by coordinating with other creditors on financing plans, the people said.

Implementation would require regulators to exempt bankers from being held accountable for possible bad loans given the high risks involved, the people said, adding that deliberations are ongoing and subject to change. The National Administration of Financial Regulation didn't respond to a request for comment. 

If the support measures are approved, they would represent China's most forceful attempt yet to plug an estimated $446 billion shortfall in funding needed to stabilize the industry and deliver millions of uncompleted homes. President Xi Jinping is also stepping up support for the broader economy, with moves this week indicating increased urgency to stop a downward spiral in the property sector from derailing growth and endangering financial stability.

“This is a good place to start to soothe buyer fears over unfinished homes, which is what has been dragging sales,” said Niu Chunbao, a fund manager at Shanghai Wanji Asset Management, adding that the measures would have been more effective if they had been rolled out earlier. “I would expect to see a sequential recovery in monthly sales after three months of implementation.”

A Bloomberg Intelligence gauge of developers rallied 9% on Thursday, while dollar bonds of some real estate companies have soared this week as investors bet on more policy action. 

China's previous measures have largely failed to arrest a slump in the home market that starved developers of cash, delayed completion of apartments and deprived the economy of a key driver. The trickle of policies included mortgage easing for buyers, down-payment reductions, and a 200 billion yuan ($28 billion) special loan pledge to ensure project deliveries. 

Authorities are finalizing a draft list of 50 developers eligible for financial aid that includes Country Garden Holdings Co. and Sino-Ocean Group, people familiar said earlier, part of the pivot by Beijing to help some of the nation's most distressed builders. Meanwhile, China's top lawmaking body said on Wednesday that banks should increase funding for developers to reduce the risk of additional defaults and make certain that housing projects get completed.

Country Garden shares jumped about 24% in Hong Kong on Thursday and Sino-Ocean surged 31%. Cifi Holdings Group Co., another struggling builder which was also included on the so-called white list, climbed 48%.

While the working capital loans may ease the industry's near-term funding challenges, it's unclear how they will ultimately impact developers' ability and willingness to repay creditors, especially offshore bondholders who have already suffered billions of dollars in losses. Shifting more of the burden to lenders also comes with risk.

China's $57 trillion banking industry has already been battling with shrinking margins and record pile of souring loans as authorities have steadily increased pressure on lenders to shore up the economy and the property sector. Net interest margins at commercial banks dropped to a record 1.73% at the end of September, below the industry's 1.8% threshold seen as necessary to maintain a reasonable amount of profitability.

Outstanding property loans at the end of September fell on a yearly basis for the first time, underlining caution at the banks. At a meeting with top financial regulators last Friday, China's biggest lenders, brokerages and distressed asset managers were told to meet all “reasonable” funding needs from property firms.

(Updates prices, adds analyst comment in sixth paragraph.)

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