Shares of debt-laden property developer Greentown China Holdings plunged 16.23 per cent yesterday on reports the mainland banking regulator had asked trust companies to report their exposure to the Hangzhou-based company.
Greentown insisted it was not under investigation itself. But shareholder reaction to a Reuters report showed how skittish investors have become about mainland property companies.
Many have borrowed heavily from banks and trust companies, and falling home sales mean they risk not being able to repay loans.
'With home sales dropping dramatically in the second half of this year, some developers will find they cannot repay trust company loans, which are often very short-term,' said Jack Rodman, the president of Beijing-based debt consultancy Global Distressed Solutions.
Trust companies are non-bank institutions that sell a range of investments, including real estate-backed loans, to private individuals.
Builders have turned to the trusts for funding after the government - in a bid to curb the property boom - ordered state-owned banks to restrict lending to the sector.
Developers are also borrowing from informal lending networks composed of wealthy individuals and cash-rich companies.
A China Banking Regulatory Commission spokesman confirmed the regulator was looking at trust companies' exposure to Greentown.
However, the spokesman said this was part of a wider review of trust company lending. 'Greentown is not the only company we are looking at,' the spokesman said.
Greentown is likely to have a 245 per cent debt-equity ratio by year end, making it the most leveraged property firm on the Hong Kong stock exchange, according to the Industrial and Commercial Bank of China.
The average Hong Kong-listed developer has a 75 per cent debt-equity ratio, ICBC said.
Greentown is also the biggest trust company borrower in its sector with 8 billion yuan (HK$9.7 billion) of trust company loans, said Citigroup analyst Oscar Choi.
Choi yesterday wrote that the other property companies that relied most heavily on trust company loans were Sunac China Holdings and Guangzhou R&F Properties.
Sunac shares tumbled 13.33 per cent yesterday, while R&F fell 8.66 per cent.
In a statement to the stock exchange, Greentown said it had 'not received any official notice in respect of the alleged investigation and request from the CBRC'.
Additional reporting by Lulu Chen