TL;DR

China’s real estate sector, once a veritable powerhouse contributing 30% of the dragon’s GDP, is now stuck in the manure. To stem any possible contagion in a world of higher interest rates, the People’s Bank of China (PBOC) says it will roll out a significant program to stabilise the market. This initiative involves offering 300 billion yuan ($41.5 billion) in dirt cheap loans to state-owned enterprises (yup, you heard that right) to buy unfinished/unsold homes from shaky developers.

Now, you might say I’m reaching a little, but to me this closely resembles the Federal Reserve’s Bank Term Funding Program (BTFP), which was introduced after Silicon Valley Bank’s (SVB) collapse in the U.S. The only real difference between the two appears to be the collateral accepted, i.e., underwater Treasuries (financial assets) versus underwater homes (hard assets, we think).

Unlike traditional quantitative easing, the PBOC band-aid (like the BTFP) is a more targeted approach, although it still involves creating new money and will to an extent contribute to currency debasement. But most of all it’s probably little more than a band-aid to cover a pretty deep cut that likely goes all the way to the dragon’s bone.

Let’s dig in a little.

PBOC's new initiative to stabilise the tanking Real Estate sector

The PBOC aims to address the real estate crisis by injecting liquidity into the market. It plans to provide cheap loans to state-owned enterprises to buy unsold homes from developers. These homes, often left incomplete or unsold due to developers' financial troubles, are to be turned into affordable housing for sale or rent.

This move is intended to give immediate relief to developers by reducing unsold inventory, providing them with crucial cash flow to complete ongoing projects and stabilise financially. Other monetary and prudential standards are also being relaxed, but they are not topic of today’s blast.

Similarities to the Fed’s Bank Term Funding Program (BTFP)

The PBOC’s approach shares similarities with the Fed’s BTFP, introduced after the SVB collapse to provide liquidity to banks holding long-term assets that had devalued due to rising interest rates. Both programs aim to prevent sectoral collapses and restore some confidence in their respective financial systems. Key parallels include:

1. Collateral-based lending - The Fed offered loans against high-quality collateral like U.S. Treasuries. The PBOC is providing loans using real estate assets as collateral.

2. Preventing systemic risk - The Fed's program aimed to prevent a banking sector collapse. The PBOC's initiative seeks to prevent a real estate sector collapse, something that could hobble China's ailing economy.

3. Targeted support - Both programs address specific sectoral issues rather than providing broad economic stimulus, like quantitative easing.

Different to other global measures

On the other hand, it looks quite different to measures in other jurisdictions that were designed to boost bank lending to targeted sectors. Here are some examples.

1. European Central Bank’s (ECB) Targeted Longer-Term Refinancing Operations (TLTROs) - The ECB introduced TLTROs to provide long-term loans to banks at attractive rates, encouraging them to lend to the real economy. This measure aimed to stimulate economic activity by ensuring liquidity in the banking sector, similar to the PBOC’s goal of stabilising the real estate sector. However, TLTROs targeted broader lending to households and businesses, whereas the PBOC’s approach is more focused on addressing the real estate market’s specific issues.

2. Bank of Japan’s (BoJ) Loan Support Program - The BoJ implemented various loan support programs to encourage banks to increase lending to sectors in need. For instance, during times of economic stress, the BoJ provided loans at low interest rates to banks, which then extended credit to small and medium-sized enterprises (SMEs). Like the PBOC’s initiative, the BoJ’s program aimed to support a critical sector and ensure stability, however the BoJ’s programs were broader, targeting various sectors rather than focusing on real estate alone.

3. Bank of England’s Funding for Lending Scheme (FLS) - The Bank of England (BoE) introduced the FLS to incentivise banks to boost lending to households and businesses by providing them with cheaper funding. The aim was to stimulate economic activity during times of economic slowdown. Similar to the PBOC’s program, the FLS sought to inject liquidity into the market, but it had a broader scope, encouraging lending across various sectors rather than targeting a specific industry like real estate.

Differences from traditional Quantitative Easing (QE)

While the PBOC’s program is similar to the BTFP, it differs significantly from QE:

1. Scope and Direct Impact

• QE - Involves large-scale asset purchases to broadly increase the money supply.

• PBOC's Program - Focuses specifically on the real estate sector, providing targeted liquidity.

2. Debasement Impact

• QE - Broadly increases the money supply, leading to currency debasement.

• PBOC's Program - Has a more contained impact, primarily affecting the real estate sector.

3. Objective

• QE - Aims to stimulate the entire economy.

• PBOC's Program - Aims to stabilise the real estate sector to prevent broader economic fallout and contagion.

A temporary band-aid?

While the PBOC’s band-aid program may offer immediate relief, it does not address deeper structural issues and it remains uncertain whether it will provide a long-term solution. But $41.5 billion is hardly dragon fire; it’s more like a band-aid.

And just like concerns about the banking sector’s stability persist in the U.S., so too will questions linger about the potential for more real estate developer defaults and insolvencies in China, despite this modest intervention.

Nonetheless, the effectiveness of these measures in restoring long-term confidence and stability will become known in time.

In the meantime, see you in the market.

Mike