Are Rumours of a Squeeze on Real Estate Loans Overstated?

Rumours have recently circulated in the Chinese media that many banks are suspending their provision of property development or real-estate related credit.

Chinese media reports recently claimed that many banks had already suspended the provision of real estate development loans, or become far more cautious about the extension of credit to the real estate sector due to heightened regulatory constraints.

Zhang Dawei (张大伟), chief analyst with Centaline Property, said regulators were placing stricter controls on the use of bank loans or trust funds to invest in the real estate market, and that the financing difficulties of real estate developers would only become more onerous.

These reports have triggered serious concerns in Chinas banking and real estate sectors, particularly given the immense volume of property-related loans held by banks.

As of mid-2017 the volume of real-estate related loans at listed Chinese banks stood at 22.6 trillion yuan (approx. USD$3.59 trillion) as compared to 12.88 trillion in mid-2014, for an increase of over 75%.

According to the Daily, however, rumours of a freeze on real estate development loans have been a regular occurrence for many years now, especially given their surging volume and high share of bank credit.

Back in early 2014 reports that Chinese banks were suspending development loans triggered panic on stock markets.

24 February saw a one day fall in the real estate share index of more than 5%, with Vanke dropping 6% and Poly Real Estate and China Merchants over 8%.

At the time the stock market rout compelled many banks to issue official statements denying the reports.

Members of China’s banking sector are now doing the same, telling Daily that the current round of reports are overstated, and that the changes in lending policy are simple part of structural adjustments. 

“Claims of a suspension of lending are exaggerated,” said one executive from a joint-stock bank in Beijing to Securities Daily.

“The market is perhaps reading too much into the standard structural adjustments made by banks.

“At the start of each year, all banks must make setting for their full year lending structure and targets, and structural adjustments with respect to key operations are very common.”

Another banking executive maintained a similar stance on reports of a real estate credit freeze.

“With regards to the suspension of handling of new real estate sector credit operations, they are based on the standard operations policy made by our bank with respect to loan structural adjustments,” he said.

“It is a temporary internal measure, and doesn’t involve anything else.”

Other sources were more equivocal in their assessments, pointing to the need to control credit extension to the property sector given that “the scale and share of real estate lending is already quite high.”

“Our bank’s development loans have not been suspended, but we are certainly being more circumspect in our choice of clients,” said one source.

“It’s quite complex determining whether or not loans have been suspended,” said another source. “Even if we all belong to the one bank, each of the branches are in different situations.”

Analysts says the relationship between banks and real estate developers in 2018 still remains uncertain, given the heavy macro-controls imposed on the property market by authorities since 2016.

The crackdown on shadow banking is also likely to impede financing options for real estate developers, given that trust loans and wealth management products have emerged as key funding channels for the sector.

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