Cautious approach: Banks are reluctant to lend to housing projects fearing more bad loans. File
| Photo Credit: Reuters

When China’s local governments began compiling a “whitelist” of housing projects for loans earlier this year, troubled developers hoped it would open a spigot of credit for a sector that remains a major stumbling block to a broad economic revival.

Four months later, new funding is only coming by the drip, reflecting the deep-seated caution about the outlook for China’s residential property market, according to Reuters interviews with bankers and developers.

Banks have been reluctant to heed Beijing’s repeated nudges to bolster credit to the embattled sector given the risks of more bad loans, further undermining confidence in the crisis-hit property market seen as crucial to shoring up a shaky economy.

New loans were only approved since late March, according to the sources, which surprised companies and investors who had expected fresh lending for developers at the start of the ‘whitelist’ programme months earlier.

The main hurdle to granting more new bank loans is the current weak property market conditions, said Lawrence Lu, managing director at S&P Global Ratings.

“Developers need to have a project in place to get funding … the issue now is whether the project can generate sufficient cash flow to repay the debt,” he said.

At least six defaulted private developers received bank approvals for new loans for “whitelist” projects since late March, according to one company statement, senior executives of two developers and two other people with knowledge of the program.

Those new loans were granted for fewer than a handful of projects and lending received so far was equivalent to hundreds of thousands of dollars per project, three of the people told Reuters.

That’s just a drop in the ocean given the vast stock of unfinished housing—a Reuters report in March estimated that the “whitelist” programme covers projects that need fresh financing of 1.5 trillion yuan.

The loans are only granted depending on the progress of construction, the three sources said, adding the volume of approval was “insignificant” given the huge number of uncompleted homes.

Frozen projects

The slow roll-out of the “whitelist” lending reflects the challenge facing Beijing which has pushed banks to speed up approvals of new loans to cash-starved private developers to complete their projects.

Under the “whitelist” mechanism launched in January, local governments nominate projects and state-owned as well as commercial banks are encouraged to provide lending. By March-end, banks had approved the equivalent of $72 billion in loans for 2,100 housing projects, state media reported.

Developers and bankers said many of these approvals restarted existing loans, rather than providing new credit.

Estimates vary widely, but analysts agree there are tens of millions of uncompleted apartments across China after a building boom turned to bust with the failure of developers. There is no public data available on the scale and terms of lending under the “whitelist” policy.

‘A bad deal’?

One of the six private developers whose projects got bank approval said it had decided to refuse the help.

“We think it’s a bad deal because financing incurs interest,” a senior executive at the developer told Reuters. “Once we use the ‘whitelist’ loans we have to complete the construction. However, we’re not able to sell all of the units under this bad market so it’s only increasing costs for us.”

Some bankers said they would continue to push back on the “whitelist” directive by negotiating with officials and explaining the shortcomings in projects.

Chinese leader Xi Jinping has called for patience in a speech released as the ruling Communist Party tries to reverse a deepening economic slump and said Western countries are “increasingly in trouble” because of their materialism and “spiritual poverty.” File
| Photo Credit: AP

China’s economy, the world’s second-largest, is now in deep distress and its successful model of growth for 40 years stands “broken”, a prominent American financial publication has said, noting that signs of trouble extend beyond China’s dismal economic data to distant provinces.

TheWall Street Journal in a major Sunday story wrote that economists now believe China is entering an era of much slower growth, made worse by unfavourable demographics and a widening divide with the U.S. and its allies, which is jeopardising foreign investment and trade.

Also Read | China’s Xi calls for patience as Communist Party tries to reverse economic slump

Rather than just a period of economic weakness, this could be the dimming of a long era, it commented.

“Now the (economic) model is broken,” the financial daily said.

“We’re witnessing a gearshift in what has been the most dramatic trajectory in economic history,” Adam Tooze, a Columbia University history professor who specialises in economic crises, was quoted as saying by The Wall Street Journal.

According to the report, the total debt, including that held by various levels of government and state-owned companies, climbed to nearly 300% of China’s GDP as of 2022, surpassing U.S. levels and up from less than 200% in 2012, according to Bank for International Settlements data.

In Beijing’s corridors of power, senior officials have recognised that the growth model of past decades has reached its limits, the daily wrote.

In a blunt speech to a new generation of party leaders last year, Chinese President Xi Jinping took aim at officials for relying on borrowing for construction to expand economic activities, it added.

“Some people believe that development means investing in projects and scaling up investments,” Mr. Xi said, warning: “You can’t walk the old path with new shoes.” Mr. Xi and his team so far have done little to shift away from the country’s old growth model, the financial daily wrote.

China’s gross domestic product (GDP) grew 5.5% year-on-year in the first half (H1) of 2023, the country’s National Bureau of Statistics (NBS) said in June.

China’s GDP reached 59.3 trillion yuan (about 8.3 trillion U.S. dollars) in the first half, according to the NBS data. In the second quarter, the country’s GDP expanded 6.3% year on year, China’s official media quoted the NBS as saying.

Meanwhile, China on Monday also trimmed for the second time this year its one-year loan prime rate (LPR) by 10 basis points from 3.55% to 3.45% and did not change the five-year rate, which stands at 4.20%, to revive economic growth in the world’s second-largest economy after that of the United States.