China extends bank deadline for capping property sector loans

China’s central bank will extend a year-end deadline for lenders to cap their ratio of property sector loans, one of the strongest moves yet by Beijing to relieve pressure from the credit crunch roiling China’s real estate sector.

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

According to a document signed off by the PBoC and the China Banking and Insurance Regulatory Commission, and viewed by the Financial Times, lenders now have more time to cap the ratio of their outstanding property loans to total loans at big banks at 40 per cent, and their outstanding mortgages as of total loans at 32.5 per cent.

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

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

While some of China’s biggest banks have already met the deadline, many midsized and regional lenders were struggling to reduce the amount of property lending after years of heavy reliance on the sector. Smaller lenders need to meet the same requirements but the ratio varies.

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 also differentiate the credit risks between individual projects and developers as well as 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 hundreds of thousands of Chinese mortgage holders protesting this year over apartments that they had already paid for being left unfinished.

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

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

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

Pressure has mounted on China’s property developers over several years after financial regulators introduced “three red lines”, which caps the ratio of debt to cash, equity and assets on developers, in a bid 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 financial local government institutions that have been heavily exposed to property sector lending.

The PBoC and CBIRC did not immediately respond to questions on Sunday.

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