Chinese leaders are making their most forceful push yet to end the nation’s property crisis, ramping up pressure on banks to plug an estimated US$446 billion shortfall in funding needed to stabilise the industry and deliver millions of unfinished apartments.

Policymakers are finalising a draft list of 50 developers eligible for financial support that includes Country Garden Holdings and Sino-Ocean Group and indicated a pivot by Beijing to help some of the most distressed builders.

Meanwhile, the country’s top lawmaking body said banks should increase funding for developers to reduce the risk of additional defaults and make certain that housing projects get completed.

“Ensuring unfinished homes be completed is a significant issue,” said Lu Ting, an economist at Nomura Holdings Inc. “It’s about peoples’ trust in the government and banks.”

As Chinese President Xi Jinping steps up support for the broader economy, moves this week indicate a widening of support with efforts to put a floor under the property crisis that’s plagued the nation’s finance industry for years. While developer stocks climbed in recent days, many investors remain wary authorities haven’t gone far enough yet to rekindle growth in a vital area for the broader economy and the push is likely to further squeeze profits at the nation’s largest lenders.

The US$56 trillion banking industry has been battling shrinking margins and rising bad loans since they were drafted by authorities to backstop the economy and prevent risk spillover from the sluggish property sector. Authorities had guided banks to trim deposit rates three times over the past year to ease their margin pressure, and slashed banks’ reserve requirements twice this year to boost their lending capacity.

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Net interest margins of the big state-owned banks dropped to a record low 1.74 per cent at the end of the first half of 2023, below the industry’s 1.8 per cent threshold seen as necessary to maintain a reasonable amount of profitability.

The sector’s shares have taken a beating. A Bloomberg index of Hong Kong-listed Chinese banks tumbled as much as 18 per cent this year from a high in May, while the big four state banks remain near record low valuations of about 0.4 of their book value.

Increasing funding would ease “panicked expectations” of households, said members of the standing committee of the National People’s Congress, China’s Communist party controlled parliament. The comments, by members who have nominal oversight of the central bank under the guidance of the Communist party’s leadership, adds pressure on the PBOC to do more to support property. The comments were published on Wednesday (Nov 22). 

“Like Morphine lessens the pain, but takes time to help in recovery, this is to make sure the delivery of unfinished projects, and to stop the worsening of worries on China’s economic outlook,” said Steven Leung, an executive director at UOB Kay Hian in Hong Kong. “This is important to have before the Work Conference next month.”

Chinese officials are due to hold the annual Central Economic Work Conference in December to flesh out policy objectives for the coming year. 

The task to stabilise the real estate sector remains challenging. Nomura estimates that the total funding gap to complete the remaining housing units would be around US$446 billion, according to a note this month. 

Meantime, Country Garden, along with Sino-Ocean and CIFI Holdings Group were included on China’s draft list of 50 developers eligible for a range of support, people familiar said on Wednesday. Regulators are set to finalise the roster and distribute it to banks and other financial institutions within days, they added. 

Country Garden’s 5.625 per cent dollar bond due 2030 rallied 40 per cent to 7.1 US cents on the dollar on Wednesday, the highest close since Sept 26, according to Bloomberg-compiled data. Its 3.3 per cent dollar bond due 2031 also gained 38 per cent to 7.1 US cents. Its shares jumped as much as 7 per cent in Hong Kong trading on Thursday. 

In order for the latest policies to be effective, authorities will need to force banks to comply, said Hao Hong, chief economist at Grow Investment Group.

“If there are only incentives and no mandatory rules, it will probably be useless,” said Hong. “If you are the head of a bank and you grant property developers loans, there’s a chance it will turn out to be a bad loan and those involved may be held accountable. Hard rules are needed, because otherwise why would a head of a bank take such a risk.” 

China’s previous measures have largely failed to arrest the slump in the market. The trickling of policies include mortgage-easing for homebuyers, down-payment reductions, income tax rebates, a push for urban infrastructure upgrades and affordable housing, and a 200 billion yuan (S$37.5 billion) special loan pledge to ensure projects are delivered. BLOOMBERG