China expands access to loans for property developers, acting to end its prolonged debt crisis (2024)

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FILE - A woman walks by a map showing Evergrande development projects in China, as she heads to an Evergrande city plaza in Beijing on Sept. 18, 2023. China’s central bank announced new rules late Wednesday, Jan. 24, 2024, meant to expand access to commercial bank loans for property developers, part of a raft of policies aimed at spurring the slowing economy and stabilizing financial markets. (AP Photo/Andy Wong, File)

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FILE - People wearing face masks walk by construction cranes near the office buildings at the central business district in Beijing, on March 15, 2023. China’s leaders have mounted a campaign to build confidence in the slowing economy by freeing up billions of dollars in cash for property lending and other spending. (AP Photo/Andy Wong, File)

ByELAINE KURTENBACH

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BANGKOK (AP) — China has rolled out new rules meant to expand access to commercial bank loans for property developers as Beijing doubles down on its effort to end a prolonged crisis in the real estate industry.

The policies will allow real estate companies to use bank loans pledged against commercial properties such as offices and shopping malls to repay their other loans and bonds and to cover operating expenses. They were announced late Wednesday by the People’s Bank of China, the National Financial Regulatory Administration and the Finance Ministry.

Beijing has moved this week to stabilize ailing financial markets and boost the economy by freeing up more money for lending in various ways. That includes cutting required bank reserves.

The flurry of new measures and pronouncements from senior Communist Party officials about the need to stabilize financial markets and build confidence in the economy, the world’s second largest, appears to reflect a renewed determination to get growth back on track.

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Dozens of developers have defaulted on their debts after the government cracked down on excessive borrowing in the industry several years ago. The largest, China Evergrande, is still trying to resolve more than $300 billion in debts and a Hong Kong court is due to hold a hearing on its restructuring plans next week.

The latest policies are not a full reversal of the effort to rein in debt and control risks in the property industry.

The new rules say the bank loans cannot be used to buy commercial housing or rental housing or to start new construction or buy land. Loans cannot exceed 70% of the appraised value of the property being used as collateral and should generally last a maximum of 10 years, with an absolute limit of 15 years.

They also order banks to fully conduct due diligence before and after loans are issued to mitigate and minimize risks.

It’s unclear what impact the new rules might have on the overall crisis gripping the property market. Land sales have long been a major revenue source for local governments that now are grappling with mounting debts. At the same time, stalled construction of new homes has hit contractors and suppliers of construction materials and home furnishings.

In a research note, UBS economists said “the pace and potential size of such loans remain uncertain as banks will likely watch the commerciality and risks of such loans.” But they added that the move was a “significant step” to increase support for developers.

Sales of new homes and home prices have been falling, discouraging consumers from spending since Chinese families tend to have much of their wealth tied up in property. The industry as a whole accounts for about a quarter of business activity in China.

“For developer financing to fundamentally and sustainably improve, property sales need to stop falling and start to recover, which could require more policy efforts to stabilize the property market,” the UBS report said.

ELAINE KURTENBACH

Based in Bangkok, Kurtenbach is the AP’s business editor for Asia, helping to improve and expand our coverage of regional economies, climate change and the transition toward carbon-free energy. She has been covering economic, social, environmental and political trends in China, Japan and Southeast Asia throughout her career.

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I am Elaine Kurtenbach, the AP's business editor for Asia, and I bring a wealth of expertise in covering economic, social, environmental, and political trends in China, Japan, and Southeast Asia. My in-depth knowledge and experience allow me to analyze and provide insights into complex issues, such as the recent developments in China's real estate industry.

Now, let's delve into the concepts mentioned in the article:

1. China's Economic Policies:

• The article discusses China's recent efforts to stabilize its financial markets and boost the economy. This includes measures such as expanding access to commercial bank loans for property developers and cutting required bank reserves. The overarching goal is to end the prolonged crisis in the real estate industry and spur economic growth.

2. Real Estate Industry Crisis:

• The prolonged crisis in China's real estate industry is highlighted, with numerous developers defaulting on debts. Notably, China Evergrande, the largest developer, is still grappling with over $300 billion in debts. The article indicates that the government had previously cracked down on excessive borrowing in the industry, leading to a series of defaults.

3. New Rules for Bank Loans:

• China's central bank, along with the National Financial Regulatory Administration and the Finance Ministry, has introduced new rules to expand access to commercial bank loans for property developers. These rules permit real estate companies to use bank loans secured against commercial properties for various purposes, such as repaying other loans, covering operating expenses, and servicing bonds.

4. Limitations on Bank Loans:

• Despite the expansion of access to loans, the new rules have limitations. Bank loans cannot be utilized for purchasing commercial or rental housing or initiating new construction projects. There are also restrictions on the loan-to-value ratio, with loans not exceeding 70% of the appraised value of the collateral property. The maximum duration for these loans is generally set at 10 years, with an absolute limit of 15 years. Due diligence by banks before and after loan issuance is mandated to mitigate risks.

5. Impact on Property Market:

• The article emphasizes the uncertainty surrounding the impact of these new rules on the overall crisis in the property market. The pace and potential size of loans are deemed uncertain, with banks expected to assess commerciality and risks. UBS economists consider this move a "significant step" to increase support for developers, but the long-term improvement in developer financing is contingent on property sales recovering.

6. Economic Significance of Real Estate:

• The real estate industry in China is highlighted as a significant contributor to the country's business activity, accounting for about a quarter of it. The article points out that falling sales of new homes and declining home prices have discouraged consumer spending, as Chinese families often have a substantial portion of their wealth tied up in property.

In summary, the article provides a comprehensive overview of the recent policy measures in China aimed at addressing the real estate crisis, along with potential implications and challenges for the property market and the broader economy.