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CLSA Expects ‘Flood’ of China Property Bond Issues

CLSA Expects ‘Flood’ of China Property Bond Issues
A rickshaw driver rests near a soon to be completed housing project on the outskirts of Shanghai, China. Photographer: Qilai Shen/Bloomberg

China’s order for banks to transfer off-balance-sheet loans may lead to a “flood” of bond issuance from real-estate companies, CLSA Asia-Pacific Markets said.

The China Banking Regulatory Commission said assets linked to wealth management products provided by trust companies must be shifted on to banks’ balance sheets by the end of 2011. The “important tightening measure” puts a funding squeeze on local governments’ special-purpose vehicles and the property industry, CLSA strategist Christopher Wood said.

“Property developers and local government-backed infrastructure projects were important beneficiaries of such funding,” Wood wrote in his Greed & Fear report yesterday. “These are precisely the areas the CBRC has been trying to curb lending to.”

Loans tied to “informal securitization,” including wealth management products provided by trust companies, suggest that bank lending in the first half was 5.9 trillion yuan ($869 billion), 28 percent higher than official numbers suggest, Fitch Ratings said on July 14. The nation has targeted total lending of 7.5 trillion yuan for the year amid efforts to cool the economy and curb property speculation.

The regulator’s “pre-emptive action” may help to prevent off-balance-sheet loans from running out of control, Wood said. While the strategist advised so-called relative return investors to hold a neutral position on Chinese bank stocks that look “statistically cheap,” he sees “better and more transparent stories” to invest in elsewhere in Asia, according to the report.

Stress Tests

China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets, a person with knowledge of the matter said.

Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.

KWG Property Holdings Ltd., a Hong Kong-listed developer, yesterday sold $250 million of seven-year bonds at a yield of about 12.5 percent to finance its property projects and for general corporate purposes.

Country Garden Holdings Co., which develops residential condominiums in China, also raised $400 million this month from an issue of five-year bonds, its second sale of U.S. dollar- denominated notes in less than four months.

The Shanghai Composite Index has dropped 2.8 percent this week, poised to post its first weekly decline in a month, after the CBRC’s move and data this week showed slowing Chinese import demand, industrial output and retail sales growth.

Tightening Outlook

The slowdown in the Chinese economy reduces the possibility of further tightening measures while beneficiaries of the nation’s growth such as the “commodity complex” are vulnerable in coming months, CLSA’s Wood wrote.

Australian equities will be the biggest losers in the Asia-Pacific region this year as a slowing Chinese economy cuts demand for commodities, Wood said in a May 19 interview. The benchmark S&P/ASX 200 Index has dropped 9.3 percent this year, compared with a 2.7 percent slide in the MSCI Asia Pacific Index.

The Shanghai index has advanced 9 percent from this year’s low on July 5 as investors speculated the government would ease property curbs and allow more lending to counter slowing growth.

Guotai Junan Securities Co. said today the recent rebound in China’s stocks may be coming to an end because of growing inflation expectations and less likelihood the government will relax policy tightening measures.

The measures will continue to weigh on big-capitalization stocks while smaller companies will face pressure from high valuations and an increasing supply of stocks that will become tradable, Guotai Junan analyst Wang Cheng wrote in a report.

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