China property defaults won’t stop banks lending to cash-strapped developers, says Goldman Sachs report

Beijing has been calling on local governments and banks to relieve an industry-wide liquidity crunch and boost homebuyer sentiment
‘Many of the losses have already been taken,’ the report points out

China property

Yuke Xiein Beijing

Published: 7:30am, 8 Feb 2024

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China’s property downturn and recent slew of defaults are unlikely to rattle overseas creditors or deter domestic banks from channelling resources towards cash-strapped developers, according to Goldman Sachs.

The share of China’s high-yield property bonds in the Asian market has declined by over 40 per cent in the past three years to account for less than 6.5 per cent of the total market value, the US bank said in a said in a February 6 report. That number was 50 per cent at the end of 2020.

“Many of the losses have already been taken,” the report pointed out, noting that over US$130 billion worth of offshore high-yield bonds have been in default in the last three years. That is on top of 160 billion yuan (US$22.5 billion) of onshore bond defaults.

Moreover, the losses and defaults tied to the property crisis have not stopped Chinese lenders from supporting the country’s struggling developers. Bank lending to the sector, as measured by loans outstanding, expanded by 7.2 per cent at the end of 2023 compared to the end of 2021.

“This highlights policymakers’ focus on addressing the ‘flow’ credit issues, directing much of the credit easing towards financing for the completions of pre-sold but uncompleted homes,” wrote Kenneth Ho, a managing director at Goldman.

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China’s larger banks have contributed to close to three quarters of new property loans, and bank lending to the developers is expected to grow 3.9 per cent year on year in 2024, the report added.

“The efforts to ensure continuing supply of bank credit to developers reinforce our view that restructuring efforts are likely to take many years, and that the China property sector will be on an ‘L-shaped’ path,” wrote Ho.

“We do not believe that improving credit supply to the property developers in and of itself will be sufficient to revive the sector … At some point, policymakers will need to address the problem of excess inventory in the real estate market, or managing the ‘stock’ problem.

“We believe this will require liquidating projects that are on developers’ balance sheets, many of which are located in lower-tier cities, and such steps are necessary to restructure and restore health in the property sector.”

Beijing has been calling on local governments and banks to relieve an industry-wide liquidity crunch and boost homebuyer sentiment in recent months, after new home prices in December recorded their sharpest decline in close to nine years according to official data.

The housing ministry launched a “project whitelist” mechanism last month, asking provincial governments to recommend to banks property projects that are deemed financially sound and could qualify for further loan support.

The whitelists, which shifted screening criteria away from the developers to focus on the financial health of individual projects, have so far led to over 17.9 billion yuan worth of bank loans being channelled towards over 83 residential property projects across the country, as reported by local media.

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