Beijing is seeking to mobilise up to Rmb1tn ($148bn) of loans for stalled property developments, in its most ambitious attempt to revive the debt-stricken sector and mollify home buyers who are boycotting mortgage repayments after lengthy construction delays.

China’s property sector accounts for about one-third of total output in the world’s second-largest economy. The industry’s prolonged downturn was a significant reason, alongside rolling Covid-19 lockdowns across the country, that growth slowed to just 0.4 per cent year on year in the second quarter.

The People’s Bank of China will initially issue about Rmb200bn of low-interest loans, charging about 1.75 per cent a year, to state commercial banks, according to people involved in the discussions.

Under the plan, recently approved by China’s State Council, or cabinet, the banks will use the PBoC loans along with their own funds, lent at market rates, to refinance stalled real estate projects.

The government hopes the banks will be able to leverage its initial fund by up to five times to raise a total of about Rmb1tn and partially fill the funding gap needed to complete unfinished projects, the people said. But bank executives and analysts have warned that the PBoC may struggle to raise its targeted amount given the difficulties banks will face in making a return on distressed real estate projects.

Overleveraged developers have had to suspend the construction of millions of apartments nationwide over the past year, raising concerns of financial and social turmoil if increasing numbers of home buyers withhold mortgage payments or take to the streets.

Multiple developers in China have defaulted on domestic and foreign debts after Beijing implemented tighter credit controls, undermining one of the most important engines of the country’s economy and leaving millions of home buyers in limbo.

Analysts, however, warned that the PBoC’s refinancing scheme would only work if the targeted developments could generate enough cash flow from sales or rentals of unsold apartments to repay the new loans.

“A lot of unfinished residential projects have already been sold out or are located in under-developed cities where home purchase and housing rentals are weak,” said Dan Wang, chief economist at Hang Seng Bank China. “That limits the number of developments the bailout fund can invest in without suffering a loss.”

Housing transactions in smaller “third-tier” cities, where most unfinished developments are located, fell more than a third this month from a year ago even after local authorities rolled out numerous support measures to boost buyer demand, ranging from interest rate cuts to subsidies on purchases.

Affected buyers are also sceptical about the central bank’s new fund.

“I can’t see any hope,” said James Lu, a sales clerk in the central city of Zhengzhou who borrowed Rmb650,000 to buy a Rmb910,000 flat. “The developer has run out of money and it doesn’t make economic sense to bail the project out.”

Lu is one of more than 4,900 home buyers at the development, Kangqiao Nayunxi, who stopped paying their mortgages nine months after construction stopped. Lu’s monthly mortgage payment of Rmb4,000 eats up two-thirds of his family’s household income.

According to estimates by Beijing-based Everbright Bank, Chinese developers have suspended construction work on as many as 8mn homes that will require an additional Rmb2tn to complete.

The delays have prompted impatient home buyers at more than 300 half-built developments — up from 200 two weeks earlier — to announce on social media that they will suspend their mortgage payments until construction resumes.

Government advisers said the scale and pace of backlash caught Beijing’s financial regulators off guard after they initially delegated responsibility for resolving the funding impasse to developers and local governments.

“Construction delay isn’t new,” one adviser said. “What is unexpected is the runaway spread of the problem.”

“It’s really a tricky situation for the central authorities to manage because they don’t want too many moral hazards — or local authorities taking many property debts,” said Rory Green, chief China economist at TS Lombard in London. “On the other hand, there are social stability issues.”

Another challenge for the bailout program is the high level of debt already incurred by stalled developments. Many distressed developers, led by China Evergrande Group, had already defaulted on payments to creditors and contractors before putting construction on hold. That could complicate the revival of construction work as existing creditors demand repayment, analysts said.

“Many unfinished projects have zero or negative value after taking into account their existing debts,” said an executive at a state lender that has been asked by the PBoC to join the bailout fund.

“We are not going to touch such projects even if it is politically correct to do so,” added the banker, who asked not to be identified because they were not authorised to speak to foreign media.

Contractors are also routinely demanding payment up front. “We have paid a steep price for extending credit in the real estate sector,” said an executive at Asia Cuanon, a building insulation materials maker based in Shanghai. “We will only start working with developers once we are fully paid.”

The PBoC did not reply to an emailed request for comment.

Additional reporting by Tom Mitchell in Singapore