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China’s Banking Regulator Reviews Trust Loans to Developers

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Greentown Says It Has No Financing Woes
The report on the inquiries also drove down shares of Chinese developers, with real estate stocks making up half of the 10 worst decliners on the MSCI China Index, amid concerns of a slowing property market. Photographer: Qilai Shen/Bloomberg

Sept. 23 (Bloomberg) -- China’s banking regulator is looking into financing of developers through trust companies as part of a broader evaluation of real estate lending, a person familiar with the matter said.

The inquiries by the China Banking Regulatory Commission are part of regular monitoring and aren’t targeting any individual company, said the person, who declined to be identified because the regulator’s queries were meant to be private.

Chinese property developers led by Greentown China Holdings Ltd. plunged in Hong Kong trading for two days on concern tightened access to loans will force them to cut prices. Greentown said it hasn’t received any notice following a Reuters report that the banking regulator ordered trust companies to report dealings with the developer.

“Given that the nature of trust loans is short term, the key question would be whether or not developers have sufficient cash to repay the outstanding loan amounts,” Samsung Securities Asia Ltd. analysts led by Wee Liat Lee, said in a report today. “We believe that developers should be financially secure should the trust loans not to be rolled over.”

Trust loans are usually debt that’s repackaged into investment products and sold to retail investors, and the loans are typically funded by banks or the investors themselves, according to Samsung Securities. For most developers, these make up less than 10 percent of their loans and the debt maturity is a few months to a year, the brokerage said, adding that the interest rate ranges from 10 percent to 30 percent.

No Trouble

Greentown, the largest builder in the eastern province of Zhejiang, said it has no trouble financing its loans and it hasn’t been queried by the banking regulator. The stock fell to the lowest since April 2009, losing 7.6 percent to HK$4.15 at the local time close in Hong Kong.

“We have not received any notice from the regulator,” Simon Fung, Greentown’s chief financial officer, said yesterday in a phone interview from the company’s headquarters in Hangzhou. “The regulator sometimes sends out some surveys or requires additional information from trust firms. These shouldn’t be called inspections.”

Developers have turned to trusts for financing as the regulator restricted bank lending for real estate to cool prices and avert a property bubble. Real estate stocks made up half of the 10 worst decliners on the MSCI China Index yesterday.


“We believe investors’ concern was overdone, mainly due to the fact that the investigation has not been confirmed, and Greentown’s management has denied that it has received any form of notification from the CBRC regarding such an investigation,” according to the Samsung Securities report today.

The CBRC isn’t targeting any individual companies and the evaluations don’t reflect its assessment of the market, the person said. The regulator has oversight of the trust industry.

Fewer than half of the 70 cities monitored by the government posted month-on-month gains in home prices for the first time in August, according to Samsung Securities. The government said this month its measures to control the property market are at a critical stage and it needs to focus efforts on curbing price increases in less affluent cities after limiting home purchases in markets including Beijing and Shanghai.

‘Increase Liquidity Pressure’

“We believe credit tightening and potential weakness in future sales volume and home prices will increase liquidity pressure for developers,” analysts at Daiwa Capital Markets led by Danny Bao said in a report yesterday. “However, we believe major developers with low financial leverage, strong contract sales and high cash ratios, are likely to benefit from the credit crunch.”

Greentown had 5 billion yuan ($781 million) of loans from trusts out of its total debt of 35 billion yuan as of June 30, Fung said. The developer had no new lending from trusts this year, as it was already very difficult to get loans from these companies last year, he said.

Greentown’s gearing, or its debt relative to equity, is the highest among Chinese developers, according to Credit Suisse Group AG’s estimates. “I think what the regulator is doing is to use Greentown as an example to check on the risks of the whole industry,” said Jinsong Du, a Hong Kong-based property analyst for Credit Suisse, who rates the stock “underperform.”

Greentown has set up a yuan-denominated real estate fund with Citic Securities Co. and is in talks with Ping An Insurance Group Co. for a similar venture to raise capital, Fung said. The company will be cautious in acquiring land in the second half as sales slowed after the government tightened rules on the property market.

Greentown is aiming for 40 billion yuan of sales this year, down from 54 billion yuan in 2010. “We cut our sales target, but it doesn’t mean we have financing problems,” Fung said. “We can still maintain the balance.”

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at

To contact the editor responsible for this story: Andreea Papuc at 3900 HK <Equity> CN

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