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  • Writer's pictureWarren H. Lau

How China Can Use Policy Support Loans to Rescue the Real Estate Sector

China's Comeback | Warren H. Lau
China's Comeback | Warren H. Lau

China's property sector has faced a severe crisis over the past year as many large developers like Evergrande have defaulted on debt repayments, raising fears of a broader economic slump. With housing accounting for over 25% of GDP, stabilizing real estate is a top priority. One tool in Beijing's toolbox that could help is Policy Support Loans (PSL).

PSLs are special low-interest loans provided by China's central bank (PBOC) and policy banks like China Development Bank to support national priorities. They have previously been used to boost infrastructure, technology and other strategic industries. Extending PSLs to property firms that are financially sound but facing short-term liquidity issues could help tide them over until market conditions improve.

Some key aspects of a PSL program for real estate include:

  • Target loans only at developers of good standing that own sizable amounts of developable land and unsold homes. This ensures funds go to finishing projects rather than unsustainable firms.

  • Impose strict covenants on how funds can be used, such as completing existing construction only rather than new land purchases.

  • Interest rates should be low but above normal bank lending rates to incentivize timely repayment instead of becoming permanent lifelines.

  • Establish a monitoring and oversight mechanism to ensure prudent use of capital and address any issues promptly.

By using PSLs judiciously to support liquidity without bailing out zombie firms, China can help realtors weather the crisis in the short run while avoiding moral hazard. This targeted approach combined with ongoing supply and demand measures can stabilize the sector for sustainable growth. PSLs thus deserve serious consideration as part of China's real estate rescue strategy.


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