China Strives to Quell Property Market Concerns, Aims to Close $446 Billion Financing Shortfall

China is intensifying efforts to address a significant shortfall in the real estate sector, pushing banks to address an estimated $446 billion gap required for stabilizing the market and completing millions of unfinished housing units. The government is nearing completion on a list of 50 property developers, including prominent names like Country Garden Holdings and Sino-Ocean Group, to receive financial aid, signaling Beijing’s commitment to support the most troubled firms in the industry. This strategic move is deemed critical for upholding public confidence in the government and financial institutions.

President Xi Jinping’s administration is broadening economic support to underpin the real estate sector, which has been a longstanding weak spot in China’s financial system. Despite a recent uptick in developer shares, skepticism persists among investors over whether the state’s measures are sufficient to spark a revival in the crucial real estate market. This renewed focus on the housing crisis is expected to compress margins for China’s largest banks even more.

The banking sector, worth $56 trillion, is grappling with reduced profit margins and an increase in non-performing loans, exacerbated by the property market’s downturn. In an attempt to alleviate pressure, regulatory bodies have directed banks to cut deposit rates and lower reserve requirements, boosting their lending capabilities. However, the profit margins for major state banks have plunged to an all-time low, challenging their profitability.

The financial health of the banking sector has also been reflected in the plummeting stock values, with a significant drop observed in the shares of Hong Kong-listed Chinese banks. The regulatory push for increased funding is aimed at calming the market and ensuring the completion of housing projects, with the People’s Bank of China (PBOC) under political pressure to intensify its efforts.

The real estate sector’s recovery is likened to the gradual effect of Morphine, as described by Steven Leung from UOB Kay Hian in Hong Kong, highlighting the importance of ensuring the delivery of housing projects ahead of China’s Central Economic Work Conference in December, where policy goals for the following year will be outlined.

Country Garden and other developers listed for support have seen an immediate positive response in their bond and stock values, indicating market approval of the government’s actions. Yet, experts like Hao Hong of Grow Investment Group caution that without enforceable rules compelling banks to lend, voluntary measures may not suffice in motivating banks to assume the risk of potentially bad loans.

The government’s prior initiatives to boost the housing market, including easier mortgages, tax rebates, and pledges for special loans, have so far not reversed the sector’s decline, pointing to the complexity of the challenges ahead.