China may lend to real estate businesses without collateral

China is considering allowing banks to issue collateral-free loans to some eligible developers. It is also finalizing a draft list of 50 developers eligible for financial support, including Country Garden Holdings and Sino-Ocean Group.

Sources also revealed that authorities are considering a mechanism that would allow one bank to coordinate support for a particular financially troubled developer by working with another bank.

However, for the new lending mechanism to be truly effective, experts say regulators need to exempt banks from liability for potential bad debts due to the risks involved.

At a recent meeting with China's top financial regulators, the country's largest banks and asset managers were told to meet all reasonable lending demands from real estate companies.

If the new support measures are approved, it would be China's most aggressive effort yet to address the roughly $446 billion capital need for real estate firms to address liquidity problems.

The call for banks to step up support for the property sector comes with risks. China’s outstanding property loans fell for the first time in nine months from a year earlier, suggesting banks are being cautious.

Trung Quốc có thể cho doanh nghiệp bất động sản vay không cần thế chấp - 1 — The largest banks and asset management companies are required to meet all reasonable lending demands from property companies (Photo: Straits Times).

If China requires providing unsecured loans to qualified real estate businesses, this will pose risks for banks, according to analysts at JPMorgan Chase.

Experts say such a measure is negative for banks as it will increase credit risks. They also predict that implementing the new measure will face many challenges as banks may avoid this directive due to concerns about credit risks.

Leonard Law, senior credit analyst at Lucror Analytics, said Beijing's latest policy move was a big step to support businesses, but may not be enough to prevent further defaults in the property sector.

The success of the unsecured lending policy will depend on the scale of funding and the willingness of banks to implement it, he said. Increased working capital can help developers complete projects quickly.

High-quality real estate businesses including private companies that have not defaulted on their loans are likely to benefit from the new lending measure, according to Zerlina Zeng, senior analyst at financial firm CreditSights.

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