China is ramping up pressure on banks to support struggling real estate developers, signaling President Xi Jinping’s tolerance for property sector pain is nearing its limit.

Developer stocks and bonds rallied in China this week on bets that authorities may introduce some of the most sweeping measures yet, creating a draft list of firms eligible for bank support while weighing a plan that would allow banks to offer them unsecured loans for the first time.

The moves are aimed at easing the real estate industry’s cash crunch, people familiar with the matter said, underscoring the anxiety among China’s top leadership over the protracted crisis. Beijing also wants to ensure developers have enough cash to finish the millions of homes under construction, even if it means added risks for its banks.

“The new round of measures to support the property sector would be powerful to break the vicious cycle of widespread defaults and avoid the spread of systemic risks,” said May Zhao, head of equity research at Zhongtai Financial International Ltd.

The fresh effort to strengthen developers adds to a slew of moves over the past year mostly aimed at stoking demand for homes, including lower down payments and easier mortgage terms. They’ve largely failed, with home sales plunging in 18 of the past 22 months. Buyers remain on the sidelines, spooked by construction delays, falling prices and company defaults.

Beijing is now setting its sights on the world’s biggest banks, urging them to extend more credit and ensure that loan growth to private developers matches the industry average. The optimistic take is that if firms like Country Garden Holdings Co. can use the cash infusion to finish homes and avoid more headline-grabbing defaults, buyers will regain confidence and sales will rebound. Banks could even avoid losses if the sector stabilizes.

“Developers can survive the downturn if the short-term liquidity issue is resolved,” said Jian Shi Cortesi, a fund manager at GAM Investment Management.

But Beijing’s previous failure to cajole commercial banks means implementation remains a question mark. And even if it works, some analysts warn the measures still aren’t large enough to meet the challenge of reviving the market.

Banks have been the weak link in China’s rescue attempts so far. Despite government exhortations since late last year for them to lend more, property loans fell year-on-year in the third quarter — the first time that’s ever happened. Banks made 2.4 trillion yuan ($336 billion) in property development loans in the first three quarters, according to China’s financial regulator.

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The slump reflects China’s unruly financial system: even though banks are mostly state-owned, they sometimes put their bottom lines above government priorities. They also struggle to implement conflicting instructions, such as helping the property market and ensuring financial stability.

“Commercial banks in China, especially the largest ones, are now very cautious,” Li Daokui, a former adviser to the central bank, warned ahead of the latest measures. “When they see signs of deterioration of developers, each commercial bank would automatically shrink from formally committed lending.”

The banks’ record on implementation is also weak. Late last year, they loudly announced huge lines of credit to developers, yet few of them actually materialized, people familiar have said. Lenders also shunned low-cost funding for property loans provided by the central bank since last year.

While some banks took the initiative this week to engage with developers for financing support on certain projects, they remain concerned about whether they’ll be held accountable for any bad debt, bankers with knowledge of the matter said.

The “actual impact is highly relying on banks’ attitudes,” said Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities.

The funding needs are massive. Just completing construction on the unfinished homes would require about 3.2 trillion yuan, Nomura economists wrote in a note this month. The latest measures seem to be short of filling that hole: The property lending targets for banks could lead to just 407 billion yuan of additional loans, Goldman Sachs Group Inc. analyst Shuo Yang said in a note.

“Recently announced and rumoured measures will not be enough to halt the sectoral slowdown,” said Rory Green, chief China economist at TS Lombard. Lower interest rates and a more expansive funding push are needed, he said, and likely to come next year.

To help mitigate risks, officials are weighing a mechanism that would allow one lender to take the lead on supporting a specific distressed builder by coordinating with other creditors on financing plans, people familiar with the matter said.

Soured Loans

Chinese property developers used to rely on selling houses in advance of construction to fund their development, with loans and bond issuance secondary. But that pre-sales funding has dried up for many developers, increasing the need for bank support.

And though the latest moves are aimed in part at stemming defaults, much damage has already been done. About 85% of the offshore property bonds by value are in default or subject to a bond exchange, according to estimates from Goldman Sachs. Some $44 billion in offshore bonds are in default this year alone, based on a tally by Bloomberg.

Another trigger is the worsening housing slump. Sales in 21 major cities fell 44% from their 2019 levels in the early weeks of November, according to data tracked by Nomura Inc., similar to the pace of contraction in July when the government lowered home purchase restrictions. That led to a sales rally in big cities that quickly fizzled out.

Developers’ funding struggles have led to “panicked expectations,” among households, China’s Communist-party controlled parliament said in a meeting last month, urging banks to do more.

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The slump may have eased the leadership’s concerns about the optics of bailing out property tycoons. Failing to take bolder action could also have political consequences: Households have protested when properties they paid for were left unfinished. The property market troubles are also dragging on economic growth, hitting consumer confidence and contributing to a weak labor market.

“It’s definitely a must to try to save developers,” said Andrew Zhu, Beijing-based fund manager at Hainan Shire Asset Management Co. “When your job is to fight a fire, you don’t have time to worry about whether one or two arsonists got away.”

--With assistance from Jun Luo, Emma Dong, April Ma, Charlotte Yang, Ishika Mookerjee and Amanda Wang.