News that China is set to launch a bailout fund to help distressed real estate developers has bolstered market sentiment, with the country’s property stocks rebounding 3-10% and high-yield property bonds up 1-4 points after the reports came out.

However, the fund is likely to be directed towards delivering unfinished housing projects instead of being used to repay property bonds, according to CreditSights, a credit research provider under Fitch Group.

“The bailout funds may help prevent the mortgage boycott from spreading further and contain systemic financial risk, but it is unlikely to immediately reinvigorate housing demand, especially in the lower-tier cities,” the report says.

Since last year, amid a worsening debt crisis in the sector, many developers have failed to finish residential projects, prompting homebuyers to refuse to pay their mortgages until their units are built. The situation has also forced some construction companies and other suppliers to stop repaying their bank loans, a situation that, if not addressed, could threaten the country’s financial stability.

Fitch believes a full bailout of the unfinished home projects is unlikely due to moral hazard concerns, and the bailout funds are unlikely to boost the recovery rates or expedite the restructuring process for holders of defaulted property bonds.

“It will take time for any property support measures to trickle down to the physical property market, and the property developers are still deep in the woods,” the report says.

Based on media reports, the initial target size of the bailout fund is 80 billion yuan (US$11.8 billion), consisting of 50 billion yuan from China Construction Bank and 30 billion yuan from the People’s Bank of China.

The fund, which can be upsized to 200-300 billion yuan, aims to extend liquidity support to 12 property developers, namely Evergrande, Greenland, Sunac, Shimao, Zhongliang, Risesun, Aoyuan, Yango, Ronshine, Kaisa, Guangzhou R&F, and Jiangsu Zhongnan Construction Group.

The State Council is also reportedly considering allowing local governments to issue special purpose bonds to acquire housing units from developers and convert them into social rental houses. The bond proceeds could be given to a local government financing vehicle (LGFV) or a government-backed social housing platform to acquire unsold residential properties from troubled developers.

The housing units could then be moved to the LGFV/housing platform's balance sheet, generating rental income to service the special purpose bonds and other related project loans. This should provide liquidity to developers that are experiencing difficulties in contracted sales, and support local housing markets by lowering housing inventories, the report says.

However, unlike the last round of shantytown reconstruction in 2015-2018, when local residents were granted cash compensations to purchase new homes, Fitch does not expect the programme to significantly boost housing prices or property demand due to the absence of cash handouts to homebuyers.