Financing for Chinese developers slows to a trickle after credit crack down
As well as bank loans, alternative financing channels have shut their doors to developers
Credit flow to Chinese developers has slowed to a trickle after authorities further tightened the screws on funding sources since March, leaving overseas financing as one of the few options left for home builders.
In China, bank credit flows to developers mainly through mortgages. In the first quarter medium to long-term household loans – mostly mortgages – grew by 1.46 trillion yuan (US$212 billion), accounting for 34.6 per cent of total loan growth, according to the People’s Bank of China.
That’s down from 44.9 per cent last year. In 2016, the big four Chinese banks granted a combined 2.76 trillion yuan worth of mortgages, up 30 per cent from a year ago. New mortgages accounted for 81.8 per cent of total new loans at the Bank of China.
The upsurge in mortgage lending fuelled a more than 30 per cent home price rally in first and second-tier cities last year, but that looks set to change.
Under Beijing’s moves to rein in credit growth in the overheated property sector, the central bank has stipulated that banks’ outstanding mortgage growth in the first quarter cannot exceed that of the fourth quarter last year, in both absolute numbers and growth rate terms. Agricultural Bank of China, one of the big state-owned lenders whose mortgage growth rate last year was 32.8 per cent, vowed to keep growth rates below that amount this year while China Construction Bank also promised the same.
Most developers interviewed by the South China Morning Post said they have given up applying for onshore corporate bond sales and have instead reverted to bank loans for credit.
“We have returned to the traditional bank loan as the mainstay financing source. Private equity funding isn’t doable. Trust loans are still doable, but access is tightening,” said Bian Li, deputy chief accountant of the property branch of China Communications Construction Company.
During previous credit tightening cycles, developers turned to alternative financing channels. Trust companies and private equity (PE) funds were more than happy to lend to cash-hungry builders, channelling funds to them at higher interest rates. But that’s come to an end.
In February the Asset Management Association of China, a semi-official organisation that oversees the nation’s securities, funds and futures companies – and the private equity schemes set up by them – banned such lending to residential projects in 16 major cities that were seen as hot spots where the shadow banking sector was most willing to lend.
Zhang Baoguo, chairman of Tongkong Investment Group, a PE firm with wide ranging investments that include real estate, said the new rule was a big blow to developers who used to rely on private equity to acquire land and replenish working capital. Smaller developers were forced into a corner due to their weak financing capacity, leaving more opportunities for industry consolidation.
Wu Ming, chief financial officer with a Hangzhou-based mid-sized developer, told the Post that trusts and PEs used to establish joint ventures with developers to acquire land. The equity the financiers held in the ventures was in most cases a form of “debt”, meaning that developers had to pay fixed returns. However, heightened checks on the sources of developers’ land acquisition funds in Shanghai and Hangzhou have made that financing model unsustainable.
When developers pledge land for project development loans, banks now offer a lower ratio of loan funds to the value of the plot, reducing the amount of land-backed financing, Wu said.
There are restrictive measures on paper and many more that are not [written down] but are being implemented
Under an even stricter policy, now implemented in some projects in Hangzhou, Hefei and Shanghai, is when a plot is sold to a developer at a high premium and the local government stipulates that the home cannot be sold until it is finished. That’s a major set back to a popular financing model used by mainland developers, where they pre-sell homes and use the funds to pay for the land.
“There are restrictive measures on paper and many more that are not [written down] but are being implemented,” Wu said. For example, local authorities will turn down an application by developers to do pre-sales or reject the project altogether if they think the selling prices are too high.
Wu said the current financing squeeze is already harsh, leaving limited room for further tightening. “They can either ban the pre-sale model altogether, or bar funds raised offshore by developers from flowing back home. But the second option is less likely because China encourages capital inflow amid the outflow pressure,” he said.
Zhang said overseas financing will be a main source for developers while local credit is tight, though issuers face rising costs amid increased competition for offshore bonds. Asset-backed securitisation will be another important source.
Mainland developers sold US$10.2 billion of dollar-denominated bonds offshore in the first quarter, compared with just US$1.46 billion a year ago, according to Bloomberg data.
