HONG KONG (Reuters) -Shares of Chinese property developers rallied on Thursday after a report that China was considering a plan for local governments across the country to buy millions of unsold homes from distressed companies to ease a protracted property crisis.

Hong Kong's Hang Seng Mainland Properties Index closed up 4.9% to the highest since Nov 24. The sub-index has gained around 30% since mid-April, when the market started speculations that more supportive measures be rolled out to stabilize the ailing sector after months of disappointing home sales.

Defaulted private developer Fantasia and KWG Group jumped 63% and 40% respectively, while state-backed Sino-Ocean Group surged 46%.

Hong Kong's markets were closed on Wednesday for a public holiday. They have been catching up to gains in mainland property shares since the previous day.

China's CSI 300 Real Estate index firmed 3.5% on Thursday, following a 2.2% rise on Wednesday.

Bloomberg News said on Wednesday the State Council was gathering feedback on the preliminary plan from various provinces and government bodies after a meeting of the ruling Communist Party leaders in late April called for efforts to clear mounting housing inventory.

Local state-owned enterprises would be asked to help purchase unsold homes from distressed developers at steep discounts using loans provided by state banks, according to the report, which added that many of these homes would be converted into affordable housing.

Reuters could not independently verify the report.

China's property sector slipped into a debt crisis in mid-2021. Since 2022, waves of policy measures have failed to turn the sector - which represents around a fifth of the economy and remains a major drag on consumer spending and confidence - around.

POLICY RAMP-UP

Over the past years, some local governments have already announced plans to buy unfinished or unsold homes from developers and turn them into social housing but the scales have been small.

Authorities also, in recent weeks, ramped up policies intended to clear the stock of unsold housing. Large cities like Beijing and Shenzhen have eased home purchase restrictions, with some allowing homebuyers to "swap" to a new home from an old one.

"We believe this could be a game changer in the sense that property sales may at least stabilize rather than turn worse," JPMorgan said in a report, referring to the reported plan in consideration.

The bank, however, added it is skeptical about whether the scale would be large enough to trigger a market recovery, unless the funding would come from the central government.

Nomura said if local governments could acquire a meaningful volume of unsold homes from developers, it would help resolve the inventory issue and also channel fund flows to the credit-trapped private companies, said Nomura.

This, in turn, would support construction activities and alleviate the sector's downward spiral, it added.

DEMAND WORRIES

However, some have been concerned about the lack of housing demand in smaller cities, with worries surfacing that such a plan would further weigh on the financial health of local governments.

Local governments are already more than $9 trillion in debt and pose a major risk to China's economy and financial stability.

"It would only work in higher-tier cities but not lower-tier ones; where would the buyers come from?" said an analyst from another Asian bank, who declined to be named as he was not authorised to speak to the media.

"Telling local governments in those cities to buy inventory would just burn their balance sheet."

Goldman Sachs estimated this week that saleable housing inventory was valued at 13.5 trillion yuan ($1.87 trillion) at end-2023 and because some of their construction had not been completed, it would require 5 trillion yuan of capital investment to complete them.

($1 = 7.2151 Chinese yuan renminbi)