Beijing has taken another step to address its stubborn property crisis and the financial fallout from it.
The aim is to alleviate the estimated 3.2 trillion yuan ($446 billion) funding gap among the nation’s property developers and, thus, lift the burden on China’s financial system and economy. Next to the tentative nature of Beijing’s earlier efforts, this latest effort looks downright forceful, but it is nonetheless inadequate to the task at hand.
This latest initiative has three basic parts. Beijing is urging the nation’s banks to boost their financing for property developers. Since most banks are state-owned, they will doubtless respond. This new urging is a complete reversal from the Chinese regime’s efforts in 2020-21, when the authorities set out to starve developers of financing. That starvation policy was itself a radical reversal from Beijing’s former and long-held policy of promoting property development. More than anything else, the 2020 decision is responsible for the crisis in the first place. Now, the Chinese Communist Party (CCP) has come full circle: promote with easy financing, starve developers of funding, and then promote it again. Economic management does not get any worse.
The second part of Beijing’s effort is to permit banks to advance unsecured short-term loans to developers. Until this latest turn, the property in question has always secured development financing. The CCP hopes that the availability of unsecured loans will enable troubled developers to repay the existing loans that stand at the center of the crisis and for which they lack the resources to discharge.
The third part of the CCP’s program is to secure a hand for the nation’s leadership in choosing which developers will get this help. Beijing will provide lenders with a “white list” of 50 eligible developers—political connections will inevitably enter the policy equation. The complete list is not yet available, but it seems that the giant developer Country Garden is on it, as is the state-backed China Vanke.
The most promising part of this new flow of credit is that it will enable developers to complete an estimated 20 million apartments for which homebuyers prepaid. If buyers can take possession of these units, China will have relieved itself of considerable social unrest. Completing these units should also relieve a fair amount of financial strain on the system because, to date, these buyers have refused to pay on the mortgages they took out in order to pre-buy these units in the first place. Presumably, once these people take possession, they will begin to pay on these mortgages, lifting from the banks what today looks like a large tranche of bad loans.
Other than this welcome effect, Beijing’s actions will only kick the can of financial troubles down the road. The developer receiving the new flow of credit may complete the units for which it contracted, but otherwise, the company will have little prospect of an adequate cash flow. Cash for the prepaid apartments has long since changed hands. The Chinese economy today offers little prospect of further development that will provide these firms sufficient flows to pay off their debts, whether old or from Beijing’s new program.
As a consequence, China’s financial institutions will continue to face the prospects of losses on these credits. The new credit flows are, in this respect, a variation on the cynical old banking saying: “extend and pretend,” in which lenders, facing a failing loan, will extend its maturity in the vain hope that somehow, at a future date, the failing borrower will secure the resources to make good on the loan.
Unless Beijing addresses this still existing financing gap, the financial crisis will resume at that future date when developers announce that they still cannot pay what they owe. Chinese bankers can see this. They know that they still face an overhang of bad debt and, therefore, a limit on the ability of Chinese finance to support other presumably more promising projects, such as the CCP’s latest decision to increase infrastructure spending. Losses imposed by failing borrowers in China’s Belt and Road Initiative will only exacerbate the problems of Chinese financial institutions and finance generally.
The CCP’s recent steps to address this festering and burdensome crisis are inadequate to the needs of the moment and certainly of the future. Neither Chinese finance, the economy, nor leadership are out of the woods on this critical matter. Its resolution will require more and bolder action out of Beijing, and it is not apparent that the CCP is up to the challenge.