China Implements New Rules to Boost Access to Bank Loans for Property Developers
In an effort to address the ongoing crisis in the real estate industry, China has introduced new regulations aimed at expanding access to commercial bank loans for property developers. The policies, announced by the People’s Bank of China, the National Financial Regulatory Administration, and the Finance Ministry, will allow real estate companies to utilize bank loans secured against commercial properties like offices and shopping malls to repay their existing loans and bonds, as well as cover operational expenses.
This move comes as part of Beijing’s broader strategy to stabilize financial markets and stimulate economic growth by increasing lending opportunities. Measures such as reducing required bank reserves have also been implemented this week.
The real estate sector in China has been grappling with a wave of defaults since the Chinese Communist Party cracked down on excessive borrowing in the industry a few years ago. China Evergrande, the largest developer, is still working to resolve over $300 billion in debts, with a Hong Kong court set to hold a hearing on its restructuring plans soon.
However, it’s important to note that these new rules do not signify a complete reversal of efforts to control debt and manage risks in the property market. The regulations specify that bank loans cannot be used for purchasing commercial or rental housing, initiating new construction projects, or acquiring land. Additionally, loans cannot exceed 70% of the appraised value of the collateral property and should generally have a maximum duration of 10 years, with an absolute limit of 15 years.
To mitigate risks, banks are required to conduct thorough due diligence before and after issuing loans. The overall impact of these regulations on the property market crisis remains uncertain. Local governments heavily rely on land sales as a significant revenue source, but they are currently burdened with mounting debts. Moreover, the halt in new home construction has negatively affected contractors and suppliers of construction materials and home furnishings.
UBS economists have commented that the pace and size of these loans are still uncertain, as banks will carefully evaluate their commercial viability and associated risks. Nevertheless, they view this move as a significant step towards providing increased support for developers.
The decline in new home sales and prices has discouraged consumer spending, as many Chinese families have a substantial portion of their wealth tied up in property. The real estate industry accounts for approximately a quarter of business activity in China. UBS economists suggest that for developer financing to see sustainable improvement, property sales need to stabilize and recover, potentially necessitating further policy interventions to stabilize the market.
In conclusion, China’s new rules regarding bank loans for property developers aim to address the ongoing crisis in the real estate industry. While the full impact of these regulations remains uncertain, they represent a significant step towards providing support for developers and stabilizing the property market.
