JPMorgan Says Unsecured Loans to China Developers a ‘Risky Move’

John Cheng, Bloomberg News

(Bloomberg) -- Any step by China to allow banks to provide unsecured loans to qualified developers “would be a risky move” for the lenders, according to JPMorgan Chase & Co.

Such a measure “would be negative for banks as it would raise concerns about national service risk and credit risk in the medium term,” analysts including Katherine Lei and Karl Chan wrote in a note. What’s more, implementation “would be challenging, as banks could circumvent such guidance due to credit risk concerns.”

China is considering allowing lenders to issue loans backed up by no collateral to some builders, which could potentially free up capital for debt repayment, Bloomberg News reported on Thursday, citing people familiar with the matter.

The unprecedented move would be part of a package of new measures to ease China’s ongoing property crisis, which has seen numerous defaults and stoked fears of contagion in financial markets. Authorities are also reportedly finalizing a draft list of 50 developers eligible for financial aid that includes Country Garden Holdings Co. and Sino-Ocean Group.

Though the developments sparked a rally in property shares as well as the broader China market on Thursday, stocks fell again on Friday. A Bloomberg Intelligence gauge of developer stocks retreated more than 2% on Friday while a broader index of Chinese stocks traded in Hong Kong dropped as much as 1.8%.

Bank shares have remained under pressure as the latest report adds to investor concerns about their profitability and asset quality. Chinese lenders have been battling with shrinking margins and rising bad loans since they were drafted by authorities to backstop the struggling economy and prevent risk spillover from the sluggish property sector.

The brokerage suggests going long property shares and shorting banks if the report on unsecured loans eventually pans out. Continuous positive news flow may support property shares in the short-term, the analysts said, while warning it may not be sustainable. More liquidity support to private developers may come only selectively and conditionally, they added.