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The Chinese government is eager to prevent a collapse of the property market from spilling over into systemic risk. Photo: Reuters

China slaps new curbs on developers to tame runaway home prices by hitting them where they hurt most: bank loans

  • Beijing’s new rules limiting property bank loans are likely to hit Chinese developers hard and weigh on the momentum of a major economic growth engine this year, say analysts
  • The new policies may let some air out of the speculative bubbles that have defied the central bank’s cooling measures since 2017
China’s financial regulators have slapped their most draconian rules yet on the 16 trillion yuan (US$2.5 trillion) real estate industry, hitting the country’s highly leveraged developers where they hurt most: their bank loans.
A new concentration management system (CMS), which took effect on January 1, limits banks’ property-related lending to their capitalisation based on a five-tier grade. The central bank’s much-vaunted “three red lines” – financial requirements that decide whether developers can borrow – have also kicked in to limit the banking system’s exposure to the property sector.
The new policies may let some air out of the speculative bubbles in the residential property market which have defied the central bank’s deflating attempts since 2017. The Chinese government is anxious to prevent any collapse of the highly leveraged property market from spilling over into systemic risk, especially while economic growth is tentative amid the global coronavirus pandemic.
Still, the measures add more pressure to the industry, which has been stymied from receiving capital even during the nation’s liquidity easing of 2020. Any overkill of the cooling measures could slow one of China’s main growth engines – residential sales and prices are expected to decline in 2021 – to such an extend that it may become a major blow to economic recovery.

“Investment in infrastructure and property led the economic recovery [in China] last year,” said Qu Hongbin, chief China economist at HSBC. “Those two engines may slow in 2021 as government bond issuance shrinks and financing rules for property developers tighten. But investment in manufacturing should rebound on the back of stronger demand, rising capacity utilisation and more digitalisation.”

Based on the types and asset scales of the banks, the CMS sets caps for the proportion of outstanding property loans to total loans in five different bank tiers. Well capitalised Tier 1 banks can lend the most, while the small, underfunded Tier 5 lenders that operate in villages or local-area limits are permitted to extend the most modest loans.

The performance of the country’s banks, mostly state-owned and managed, will essentially be evaluated on criteria that replaced the former indicators of profitability, growth, asset quality and solvency, according to the Ministry of Finance. Their key performance indicators are now to serve the national development goals and the real economy, achieve high-quality development, control and prevent risks, and improving operational efficiency.

The “three red lines”, meanwhile, require developers to cap their liability-to-asset ratio, excluding advanced proceeds, at 70 per cent and their net debt-to-equity ratio at 100 per cent. Their cash to short-term debt ratio must be at least one. Developers that fail to meet the three specific financial requirements will be restricted or even completely prohibited from borrowing.

A residential community in Nanning, south China's Guangxi Zhuang autonomous region on August 19, 2017. Photo: Xinhua

Some moved quickly to fulfil the financial criteria of the new rules and increase their chances of enjoying access to bank credit.

Guangzhou R&F Properties parked its stakes in several units under a local government, in a de facto nationalisation of its assets, to pare back its debt exposure. Hong Kong-listed Agile Group Holdings sold stakes worth 7.05 billion yuan in seven property projects to Ping An Insurance Group before the rules took effect at the start of this year.

Some economists and analysts expect the new CMS rules to slow property investment in China this year, making life difficult for smaller developers and leading to faster consolidation in the market.

“The unprecedented ceilings on bank loans constrict the largest source of credit for developers. At the same time, limits on mortgage loans could subdue home-buying demand,” said S&P Global Ratings credit analyst Aeon Liang in a report on Wednesday.

The growth of China’s property investment market had already steadily slowed month by month in 2020, rising just 0.5 percentage point between January and November, the lowest pace since the nation was still entangled in lockdowns at the peak of the pandemic. Land purchases and new housing starts also dropped year over year in the newest reading, official data shows.

“The CMS rules will lead to financial institutions such as banks preferring larger developers to make sure its lending is legal and efficient when the loan proportion can be maintained,” said Zhang Bo, chief analyst at 58 Anjuke Real Estate Research Institute, a Shanghai-based firm.

This article appeared in the South China Morning Post print edition as: Beijing tightens lending rules for developers
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