Chinese property stocks soar on hopes of turning point for the sector

Shares in Chinese real estate companies rose sharply on Monday as a 16-point plan to support the debt-ridden sector was interpreted as a crucial pivot by Beijing that could spark a revival.

The Hang Seng Mainland Properties index rose as much as 16.3 percent in the morning session on Monday. Hong Kong-listed Country Garden, one of China’s biggest developers, gained more than 36 percent. The benchmark Shanghai Composite Index was up 0.8 percent while the Hang Seng added 3.3 percent.

The measures, outlined in a policy document from the central bank and the banking regulator, include extending a year-end deadline for lenders to cap their ratio of property sector loans, one of the strongest moves by Beijing to relieve pressure from the credit crunch roiling the industry.

The People’s Bank of China’s extension of the “collective management system for real estate loans” has the potential to affect 26 percent of China’s total banking loans, giving lenders and cash-strapped real estate developers breathing space as they fight to survive a massive property sector downturn.

According to the document signed off by the PBoC and the China Banking and Insurance Regulatory Commission, and viewed by the Financial Times, lenders now have an as yet unspecified amount of time to cap the portion of their outstanding property loans at big banks at 40 per percent of total loans and their outstanding mortgages at 32.5 percent.

The extension beyond December 31 is the most important in a batch of 16 relief measures approved by central bankers and the CBIRC on November 11, according to the document.

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“It’s a vital pivot,” said Yan Yuejin, research director of E-house China Research and Development Institute, adding that while pressure on excessive lending remained, the measures provided relief for commercial banks and leeway to issue new loans.

They also come after the expansion of a key funding support program that could help developers sell more bonds and ease their liquidity woes. “Together with the previous Rmb250bn ($35bn) bond sale program support, we view this may mark a turning point for the property sector, as the government is turning to support developers on top of supporting industry,” said UBS analysts in a note.

Nomura analysts wrote: “Cash-strapped developers (especially private ones) construction companies, mortgage borrowers and other related stakeholders can now breathe a sigh of relief.”

Developers’ outstanding bank loans and borrowings from trust funds due within the next six months can be extended for a year, the document showed.

Regulators urged banks to differentiate between the credit risk of individual projects and that of developers and to negotiate with homebuyers on extending mortgage repayments and credit score protection. Lenders are also encouraged to raise funds to buy out unfinished projects and turn them into affordable rental houses, the document showed.

These moves are designed to keep lines of credit open to real estate groups and enable them to finish incomplete developments. They come against a backdrop of Protests by hundreds of thousands of Chinese mortgage holders over apartments that they had already paid but were left unfinished.

The package marks the latest sign of Beijing having to backpedal on its sweeping property sector reforms amid fears of a credit crash and social instability.

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The Chinese market has been stunned by a rising number of defaults and hurried asset sales by developers. The pace of new loans and total social financing has retreated faster than expected amid sluggish demand.

Evergrande, China’s most indebted developer with about $300bn in liabilities, took a $770mn loss last week following the forced sale of one of its most prized assets. It also plans to put its Shenzhen headquarters up for sale with a starting auction price of $1.06bn.

Pressure has mounted on China’s property developers for the past several years after financial regulators introduced “three red lines”, which cap the ratio of debt to cash, equity and assets on developers, in an effort to deleverage the property sector.

The severity of the property downturn, however, has sparked fears of a generational slowdown in Chinese economic growth. And it has increased the risk of contagion spilling into China’s local government financial institutions that have been heavily exposed to property sector lending.

The PBoC and CBIRC did not immediately respond to requests for comment.

Additional reporting by Edward White in Seoul and Thomas Hale in Shanghai

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