Chinese property firms getting squeezed

Updated: 2011-08-10 15:04

By DINNY MCMAHON (Wall Street Journal)

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BEIJING - China's property developers are heading for a funding crunch in the next several months, analysts and industry executives say, as the government tightens access to credit from the lightly regulated trust firms that have become the sector's biggest lenders.

The efforts by the China Banking Regulatory Commission, which haven't been publicly announced, add pressure to an industry that already was struggling with other government attempts to take some of the air out of the country's property bubble. How those efforts proceed, and whether the credit squeeze contributes to a significant decline in construction, has big implications for overall growth in the world's second-largest economy, which has been a rare bright spot in an otherwise gloomy global outlook.

Trust companies are investment vehicles unique to China. They don't take on the risk of an investment themselves, but funnel funds from companies and wealthy individuals into a range of investments, including private equity, loans, direct stakes in property development, and even bonds and stocks.

New lending to property developers from traditional banks plunged in the second quarter, to 42 billion yuan, or about $6.5 billion, from 167.8 billion yuan in the first three months of the year, according to the People's Bank of China.

Trust companies, which aren't subject to the same constraints as banks, made up for much of the shortfall, nearly doubling their amount of new financing to the property sector in the second quarter to 136.7 billion yuan, from 71.1 billion yuan in the first quarter, according to data issued recently by the China Trustee Association, a government backed industry group.

Now, regulators are turning their attention to closing that loophole, analysts say.

The China Banking Regulatory Commission now requires that, prior to any deal to provide financing to a property project, trust companies must submit to the regulator key details about the transaction. This effectively gives the commission the power to quash a deal in advance, according to analysts who have spoken with trust companies.

That is a change from previous practice, when trusts only needed to submit paperwork documenting the deal after the financing was complete. The commission didn't issue a statement on the policy change, instead informing trust companies by phone, the analysts say.

"Developers have increasingly turned to trust companies as the only formal source of financing," said Jinsong Du, a property analyst at Credit Suisse. A crackdown by the banking regulator "would result in an even bigger correction for the property sector."

In a statement to The Wall Street Journal, the commission declined to comment on whether it had changed the way it regulates trust financing of the property sector.

"The CBRC has always supported trust companies developing property business in accordance with the law," the commission said. "It requests that trust companies reasonably control the pace of development, and strictly control risks."

An executive at a major trust company said his firm got a call from the commission explaining the new rules at the end of June. The volume of financing his firm provides the property sector has dropped sharply since then, he said.

"It's our feeling that the CBRC is doing this to slow things down," said Standard Chartered economist Stephen Green. "It's not going to get any easier" for developers.

That view was echoed by industry executives. "The property sector is in the most dangerous of times," Pan Shiyi, chairman of Soho China Ltd wrote on Sina Weibo, China's Twitter-like Web-messaging service, on July 13. "Every firm is forced to shout their last cry," he said, paraphrasing China's national anthem.

Soho China is one of Beijing's biggest real-estate developers.

Wang Shi, chairman of China Vanke Co, China's biggest home builder, wrote on Weibo the same day that "100 percent of companies are all feeling the pressure" from government tightening. "Capital supply is tight. We're at the point where the government's adjustments are riding the tiger, but it's difficult to get off."

The government's earlier effort to clamp down on traditional lending sparked warnings to investors in property companies. Early this year, Standard & Poor's lowered its outlook for Shimao Property Holdings Ltd and Glorious Property Holdings Ltd to negative from stable. The ratings firm made similar moves for three other Chinese developers late last year.

In April, Moody's Investors Service issued a report listing 10 Chinese property developers it said were particularly vulnerable to a significant downturn in sales as a result of reduced credit.

Glorious declined to comment. Shimao didn't respond to requests from The Wall Street Journal for comment.

Sue Feng contributed to this article