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China property support measures are costly to banking system

Despite the headwinds, a full-blown banking crisis is still unlikely, said UBS.
Banknote currency Chinese Yuan (CNY or RMB) and wooden house block for property and land business concept

Around 80% of the stalled housing projects in China need additional funding and the total cost to bail them out could be Rmb657bn ($91.3bn), according to estimates from UBS.

China’s state-owned banks such as Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Agricultural Bank of China announced last week that they will be provide funding support to property companies.

The measures are in response to the government’s 16-point property relief measures, which were officially published last Wednesday.

“The banks will have to figure out ways to conduct the market-based financing while minimising the NPL risks of the loans granted to resume the project construction,” said May Yan, head of Greater China financials equity research at UBS.

Aside from state-owned enterprise (SOE) bank support, the People’s Bank of China also announced it would provide a Rmb200bn interest-free re-lending facility to six large SOE banks to resolve halted housing projects.

“Meanwhile, banks seem to be attempting to contain their risks by cooperating with best-quality large SOE, quasi-SOE and healthy privately-owned enterprise (POE) developers, whereas ‘risky’ POE developers are largely excluded from the list except for Country Garden,” said Yan.

Yan noted that the most effective way for large distressed private property developers to improve their liquidity would be to obtain unsecured loans or bonds as they have difficulty providing valuable collateral or seeking local government backing to obtain financing.

“However, banks so far still refrain from providing such support, as unsecured lending could be associated with a high loss rate, up to 90% by our estimate,” she added.

By UBS’ estimates, China’s banks have approximately Rmb88trn exposure to the property sector and the downturn could cost the banking system Rmb1.4trn-1.5trn in the next few years.

Yet, the Swiss bank also noted that the banking system has a large non-performing loan reserve of Rmb6trn that could be used and does not expect a banking crisis.

“In spite of some volatilities in the course of Covid control relaxation and property stabilisation, the overall direction of China’s reopening is certain and we remain bullish on retail and wealth management focused China bank stocks,” Yan concluded.

Part of the Bonhill Group.