China's State Financial Institution Support Serves as a Buffer Against Real Estate Reform Financial Risks
Macro
The Chinese government's support for state-owned financial institutions is also seen as a measure to guard against financial risks accompanying real estate market reforms. In August, the government shifted its policy to emphasize the sale of completed homes, citing that the practice of selling homes before completion had led to overinvestment and debt expansion by real estate developers. While this is part of protecting buyers, it may also exacerbate the deterioration of developers' cash flows. On August 28, Chinese authorities announced measures to encourage developers to correct their business model of relying on down payments and mortgage funds collected through "presale" to sustain operations. They required financial institutions to disburse loans only after home completion, while extending the maximum repayment period from 30 years to 40 years to ease the burden on buyers. With the shift to post-completion sales, developers must cover construction costs with their own funds or bank loans until completion, leading the market to view this as a "painful reform" and raising credit concerns in the real estate industry. Related stocks plunged in mainland China and Hong Kong markets. Rating agency Fitch Ratings analyzed that weaker companies will be weeded out, accelerating industry consolidation in the real estate sector. If financial institutions' reluctance to lend reduces funding to developers, the property downturn could deepen further. The government's support for state-owned financial institutions is thus likely to serve as a "buffer" to absorb the operational and credit risks arising from real estate market reforms.
