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China Builders Plunge in Hong Kong on Trust Financing Report

China Builders Plunge in Hong Kong on Trust Financing Report
Deprived of bank loans by government policies, developers pay between 16 percent and 25 percent to borrow from trusts, an official at Beijing-based National Trust, who asked not to be identified as he isn’t authorized to speak to the media, said in May. Photographer: Qilai Shen/Bloomberg

Chinese developers plunged in Hong Kong trading after Reuters said the nation’s banking regulator told trust companies to report dealings with Greentown China Holdings Ltd., sparking concerns of a funding squeeze.

Greentown, the largest builder in the eastern province of Zhejiang, slumped 16 percent to HK$4.49 at the close of trading in Hong Kong, the most in almost three years. The developer said it hasn’t received the regulator’s notice. KWG Property Holding Ltd. tumbled 12 percent, while five of the 10 biggest decliners on the MSCI China Index were property companies.

The China Banking Regulatory Commission ordered trust companies to assess their risks associated with Greentown’s parent and its units, Reuters reported, citing unidentified people. Developers have turned to trust companies for financing as the regulator restricted bank lending for real estate to cool prices and avert a property bubble.

“Developers have already exhausted all options to preserve cash,” Credit Suisse Group AG analyst Jinsong Du said. The crackdown on informal lending may cause a “domino effect” in which developers needing cash cut prices to sell, forcing others to follow, Du said.

A gauge of property stocks on the Shanghai Composite Index declined the most among industry groups, dropping 4.2 percent.

No Notice

Greentown said in a statement to the Hong Kong exchange it hasn’t received a notice from the banking regulator and there is no investigation into the group. Two phone calls to the CBRC’s news department weren’t answered.

The report may be a sign that China is trying to restrict financing sources for developers, Du said in a note today. China’s developers may pay interest of as much as 25 percent to borrow from private trust companies to skirt tighter rules.

“Investors are worried that the regulator will further tighten developers’ financing through trust funds,” said Johnson Hu, a Hong Kong-based property analyst of CIMB-GK Securities Research. “Financing through trusts accounts for quite a big pie of developers’ total financing, especially for those non-listed small and mid-sized developers.”

Deprived of bank loans by government policies, developers pay between 16 percent and 25 percent to borrow from trusts, an official at Beijing-based National Trust, who asked not to be identified as he isn’t authorized to speak to the media, said in May.

Renhe, Country Garden

Renhe Commercial Holdings Co., a developer of underground commercial centers, plunged 19 percent, the most ever. Country Garden Holdings Co. declined 12 percent, while Agile Property Holdings Ltd. tumbled 15 percent. Shimao Property Holdings Ltd. lost 11 percent.

Hopson Development Holdings Ltd. shares declined 11 percent in Hong Kong. The developer had its credit rating outlook cut to “negative” from “stable” by Standard & Poor’s Ratings Services, citing its “aggressive debt-funded expansion, weak sales execution record and ongoing corporate governance.”

The yield on Hopson’s $300 million of 11.75 percent notes due January 2016 was at a record 21.4 percent today, according to Royal Bank of Scotland Group Plc prices on Bloomberg. The extra yield investors demand to hold the bonds over U.S. Treasuries rose 2 basis points to 2,077 basis points, also a record high, RBS and Bloomberg pricing data show.

The yield on Guangzhou, southern China-based Evergrande Real Estate Group Ltd.’s $1.35 billion of 13 percent notes due in January 2015 rose 252 basis points to a record high of 21.328 percent today, RBS prices show. The shares fell 11 percent, the most since November 2009.

‘Not Surprised’

Greentown, based in the eastern city of Hangzhou, mainly develops high-end homes in 39 Chinese cities. The company cut its presales target by 20 percent to 40 billion yuan ($6.3 billion) because of its developments in cities with limits on property purchases, Jefferies International Ltd. said in an Aug. 29 report.

The developer told analysts in a briefing at the time that banks had stopped their trust financing in the first half and the company will switch to private equity or real estate funds in the second half, Jack Gong, an analyst at Jefferies, said in an interview today.

“We were not surprised because this was in line with government orders,” said Hong Kong-based Gong. “The market just tends to overreact on negative news.”

Chinese regulators told banks to tighten lending for real estate on concern credit risks will increase as the impact of government curbs deepens, a person familiar with the matter said last month. Lenders were told not to extend the maturity of loans to developers, not to grant new credit to help repay maturing debt, and to set higher standards on loans for commercial properties than residential, the person said.

‘Very Weak’

The government said in July that it will rein in residential prices in smaller cities after it raised down-payment requirements and mortgage rates earlier this year. China also increased major lenders’ reserve-requirement ratios by 0.5 percentage point to a record 21.5 percent starting June 20 and raised interest rates five times since September.

Almost 70 percent of developers said their cash-flow conditions in August worsened from July, independent investment-advisory firm CEBM Group Ltd. said in an Aug. 5 report, citing a monthly survey of real-estate companies in 12 Chinese cities. That was an increase from 22 percent in July.

The curbs will make smaller developers “very weak,” said Nicole Wong, a Hong Kong-based analyst at CLSA Asia-Pacific Markets. “The industry will go into a consolidation stage and players with big brand names will get stronger.”

Home Prices

China’s new-home prices rose in August from a year earlier in all 70 cities monitored by policy makers, according to figures released by the statistics bureau on Sept. 18. Of the cities, 16 posted declines from July, and another 31 were unchanged in August from the previous month, the data showed. That’s the first time fewer than half of the cities surveyed posted month-on-month gains, according to Samsung Securities.

Deutsche Bank AG checked the trust loan financing of 17 developers, including Renhe and Agile, and “the overall exposure is not significant,” analyst Tony Tsang said in an e-mailed note to clients today.

“We believe the investigation on Greentown is an independent incident that should not be applied to others in the industry,” Tsang said.

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