China intensifies its economic support as the vote on the Country Garden project approaches

BEIJING/HONG KONG (Reuters) – China stepped up measures to boost the country’s ailing economy on Friday, as major banks paved the way for further cuts in lending rates and sources said Beijing was planning more measures, including easing restrictions on home purchases.

As part of these measures, the authorities have also reduced the amount of money institutions need to hold in foreign exchange reserves. The measures have delighted investors, and analysts said they should prevent further contraction in the ailing real estate sector.

China is grappling with a slowdown that has rocked global markets, with the spotlight now firmly focused on the mounting debt crisis of struggling developer Country Garden (2007.HK) in a sector that accounts for about a quarter of the economy.

As pressure mounted, the authorities launched a series of measures to stimulate the economy and revive the real estate market, with steps including relaxing some borrowing rules and reducing the amount of foreign exchange reserves banks must hold.

Four people familiar with the matter said the country was ready to take further measures, including easing restrictions on home purchases.

Regulators, including the Housing Ministry, the central bank and the Financial Regulatory Authority, will in the coming weeks implement measures they have been working on over the past few months under the guidance of the State Council, two of the people said.

Many nationwide real estate easing measures in the past two weeks have exceeded market expectations, said Betty Wang, chief China economist at ANZ Bank.

“This is the first time since 2021 that China has announced a series of nationwide real estate easing measures. It will help restore market confidence and prevent the sector from falling further.”

Countryside garden test

However, in the near term, market sentiment will be affected by the outcome of the critical test of investor confidence in Country Garden.

Country Garden on Thursday postponed the deadline for creditors to vote on whether to defer payments on a 3.9 billion yuan ($537 million) special bond until Friday at 1400 GMT to give bondholders “sufficient time” to prepare for the vote.

Before Friday’s vote result, some of the country garden’s private bonds’ internal creditors had received interest payments, people familiar with the matter said. They declined to be named because they are not authorized to speak to the media.

Country Garden declined to comment.

Friday’s vote is a major hurdle for Country Garden in its quest to avoid default, with one holder of dollar bonds telling the developer that if the company can’t extend its domestic debt, it can’t serve overseas bondholders.

“This was a slow-motion car accident,” said the bondholder, who requested anonymity due to the sensitivity of the issue, adding that concerns centered around uncertainty about the broader economy and tensions with Washington.

“Everything they do now will have an impact five to ten years from now.”

Country Garden, China’s largest private real estate developer by sales, did not immediately respond to a Reuters request for comment.

The tension in the real estate market has intensified pressure on Beijing to implement supportive measures and raised concerns about the ability of policymakers to halt the decline in China’s broader economic growth.

New home prices in China fell for a fourth month in August, according to a special survey conducted on Friday, as the mortgage debt crisis kept confidence at a low level despite a series of support measures.

Reducing interest rates on deposits

The central bank said on Friday it would cut its foreign exchange reserve requirement ratio by 200 basis points to 4% from 6% starting September 15, a move aimed at slowing the pace of the yuan’s decline.

Lenders who cut mortgage rates on Friday included the Industrial and Commercial Bank of China (601398.SS), the China Construction Bank (601939.SS), and the Agricultural Bank of China (601288.SS), which cut their deposit rates by between five And 25 benefits. Websites from each bank showed the basis points. Several medium-sized banks also announced that they will begin reducing interest rates on a range of deposits by 10 to 25 basis points.

These measures helped raise confidence in the market and affected real estate stocks rose, with the China CSI 300 Real Estate Index (.CSI000952) rising by 2.4%, while the CSI 300 Blue Chip Index (.CSI300) rose by 0.5%.

Three sources familiar with the matter told Reuters on Tuesday that major state banks will reduce interest rates on deposits as they prepare to cut interest rates on existing real estate loans soon.

China’s central bank and financial regulator announced Thursday that from September 25, first-time homebuyers with mortgages can apply to their banks for a lower interest rate on their existing loans.

The reductions in interest rates on deposits are the third of their kind in one year, as the size of the reductions was greater than the previous two rounds in June and September of last year.

Lower deposit rates will partly offset various pressures on banks’ tight net interest margins – a key measure of profitability, said Nicholas Chu, a banking analyst at Moody’s.

“The impact of lower interest rates on deposits is substantial, given that nearly three-quarters of Chinese banks’ liabilities are deposits,” Zhou said.

China’s total mortgage loans reached 38.6 trillion yuan (5.29 trillion US dollars) at the end of June, accounting for 17 percent of total bank loans.

Meanwhile, Beijing and Shanghai announced on Friday that they will allow homebuyers to enjoy preferential loans for first home purchases regardless of their previous credit records.

With this, all of China’s first-tier cities have expanded the definition of first-home mortgage, in a bid to boost buyers’ sentiment.

($1 = 7.2633 CNY)

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