China taking unprecedented measures to support the construction sector

By Rhod Mackenzie

The Ministry of Finance of the People's Republic of China is investigating the potential of granting unsecured short-term loans to eligible developers for the first time, according to reports in the Chinese media. This move is a part of the initiative to combat the severe crisis in the Chinese real estate market, which is impeding the growth of the second largest economy in the world.

The loans in question are referred to as "working capital loans." Unlike other types of loans and borrowings available to developers that necessitate land or assets as collateral, the new facility will be unsecured and for everyday operations. This new type of loan will release capital to settle debts.
Furthermore, the Ministry of Finance is developing a framework that enables a single creditor to take the lead on providing aid to a struggling developer while coordinating financial strategies with other creditors.

In order to introduce new financial tools, regulators must absolve bankers of liability for poor loan decisions due to the high level of risk involved. If the new measures to support the construction sector are approved, it will be Beijing's most robust attempt yet to close a £325 billion financing gap, stabilise the construction sector and clear existing construction backlogs.

President Xi Jinping has also directed increased assistance for the economy as a whole. After the news of an impending aid package for the construction sector, construction stocks and bonds saw a sharp incline.
Regulators are finalising a list of 50 developers eligible for financial aid from the government. This includes the major construction firms Country Garden Holdings Co. and Sino-Ocean Group. Legislators are also expressing their concerns regarding the future of the construction industry. They called for banks to boost funding for developers to reduce the risk of fresh defaults in the construction sector and to eradicate incomplete building projects.

Working capital loans could alleviate the construction industry's restricted credit environment in the short term. Nevertheless, it remains uncertain how these loans might impact builders' capacity and willingness to repay creditors, particularly offshore debt holders, who have already sustained billions of dollars in losses due to the sector's crisis. Analyst caution that transferring some of the debt burden to creditors also poses inherent risks.

The banking system worth $57 trillion in the Celestial Empire is facing numerous issues. The significant amount of non-performing loans is particularly concerning. At the same time, the administration persistently urges bankers to elevate their support for the economy as a whole and the construction industry in specific.

The net interest margins in Chinese commercial banks have plummeted to an unprecedented 1.73% at the conclusion of September, which is below the 1.8% benchmark suggested by experts to ensure adequate profitability.

Banks have been acting very cautiously lately. Its not surprisingly, the end of September marked the first year-on-year decline in outstanding real estate loans.