With China reeling under a property crisis and many real estate developers struggling to find funds to pay their dues, some are worried about the sector’s liquidity situation. There are fears that a few developers will default on their debt obligations, triggering an economic crisis. To avoid such a situation, Beijing has called on the country’s banks to boost their lending to real estate firms.
The direction was given in December and was taken after the real estate industry saw two-quarters of declines, anonymous sources told Bloomberg. Bank loans to property developers declined by 120 billion yuan ($18.82 billion) in Q2, 2021, and 140 billion yuan ($21.96 billion) in Q3.
As of Sept. 2021, Chinese banks had 51.4 trillion yuan ($8.06 trillion) in outstanding loans exposed to the real estate industry, which accounts for roughly 27 percent of total lending in the country.
In addition, Beijing will no longer count borrowings by property developers for mergers and acquisitions (M&A) towards the administration’s “three red lines” criteria that are aimed at limiting the debt levels of these companies. The decision to ease M&A rules comes as many real estate developers are finding it difficult to sell off their assets to raise cash and meet their obligations.
“Project M&A is the most effective market-oriented way for the real estate sector to resolve risks… Many stronger developers showed a willingness to buy distressed assets from cash-strapped peers,” Lan Zou, an official at the People’s Bank of China, said at a recent press conference.
According to one executive from a developer, M&A debt relaxation is a welcome development as it will help real estate firms buy cheap projects without getting worried about adding to their debts and worsening their financial position.
However, some believe the decision does not represent any significant change in Beijing’s tough stance on the real estate industry.
“The news, if true, will encourage more M&As in the sector… The move, however, will not solve the liquidity problems of many second-tier developers, which [still] need timely refinancing to meet their debt repayment in the near future,” Raymond Cheng, property analyst at CGS-CIMB,” told the South China Morning Post (SCMP).
Cheng pointed out that developers who are financially sound are not interested in M&A right now due to fear that it might cause them to break Beijing’s “three red lines” rules. The three red line regulations insist that real estate firms maintain cash to short-term debt ratio of one, a net debt-to-equity ratio of less than 100 percent, and a liability-to-asset ratio (excluding advance receipts) of less than 70 percent.
In the Guangdong province in southern China, the local government has conducted meetings with property developers, potentially allowing their assets to be taken over by state-backed entities. The meeting came after Beijing’s relaxation of M&A debt rules.
“The Guangdong meeting underscored the government’s focus on asset disposals for troubled enterprises. As large real estate enterprises in Guangdong were involved in these talks with the local authorities, it was a chance for highly indebted enterprises and those in better financial status to talk face-to-face, in order to accelerate the process,” Yan Yuejin, research director at Shanghai-based E-house China R&D Institute, told Global Times.
This month, China’s real estate sector is due to pay at least $197 billion in bonds, trust products, coupons, and deferred wages. China’s banking sector will also be greatly affected by the property crisis as real estate companies will not be able to pay their bank loans. According to an S&P Global report, Chinese banks’ bad loan ratio of property loans could have doubled from the middle of 2021 to the end of last year.