China’s largest state-owned banks made a series of pledges this week to provide credit for major SOE and POE real estate developers. The total pledged support is reportedly at least CNY925bn, which is more than three times larger than any other individual measure previously announced. If there are lingering doubts on China’s 16-point guidance for financial institutions to support the real estate sector, we believe this series of co-ordinated pronouncements should fully dispel them. We maintain our view that a meaningful policy shift has occurred (see pdf: Credit: China’s new policy measures to support refinancing and real estate, 14 Nov), evident from the energetic policy stance, and an accompanying comprehensive package of measures. The Big Six banks are likely to heed policy directives to finance real estate companies that have not defaulted, and we expect new financing to chiefly benefit SOE developers, and the financially stronger POE developers.
Complementing this credit development is news that the State Council is considering a cut to the Reserve Requirement Ratio (or RRR) at an appropriate time. An RRR cut will be helpful to free up liquidity for banks to lend, especially with a recent tightening of RMB liquidity conditions. Given a series of false dawns in the past, investors are understandably still skittish over purported real estate support from Chinese authorities. Hence, the rally in China developer credit has taken a pause this week, if not a reversal in some cases. But we do not think this is a rally that should be faded given a slew of policy turns, particularly on the relaxation of quotas for bank lending to real estate. Bond market financing plays a secondary role compared to bank financing in China. As such, the availability of new loans alone should be adequate to ensure project delivery, facilitate industry consolidation, and ensure continued servicing of debt for strong developers.
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