Chinese property shares fell to an eight-month low as Industrial Bank Co.’s suspension of mezzanine financing for developers fueled speculation lenders may pare real-estate funding.
The Shanghai Property Index lost 2.1 percent to close at 2,997.56, the lowest level since June 26 and extending its 5.4 percent slump yesterday. The Fuzhou city-based bank is delaying loans for property-related projects until the end of March as it prepares a new set of internal guidelines for credit allocation, it said in a statement to the Shanghai Stock Exchange yesterday.
While China International Capital Corp. estimates that mezzanine financing accounted for just 2 percent of the nation’s property investment last year, Industrial Bank’s decision heightens concerns about an industry already grappling with falling sales and slower growth in new-home prices.
“This is a single event with limited impact on Industrial Bank itself,” Mu Hua, a Guangzhou-based analyst at GF Securities Co., said by phone today. “It could have a significant spillover effect if China’s property market turns sharply downward and more developers cut prices. That will force other banks to re-evaluate their portfolio and lending policies on real estate loans for fear of having more bad debts.”
Press officers for Industrial & Commercial Bank of China Ltd., Bank of Communications Co. and Agricultural Bank of China Ltd. said there were no changes to their policies on lending to developers. Spokesmen for China Construction Bank Corp. and Bank of China Ltd. weren’t immediately available to comment. The five banks, the nation’s largest, controlled 43 percent of China’s banking assets as of Dec. 31.
China Vanke Co., the nation’s biggest listed developer, lost 1.8 percent to 6.57 yuan in Shenzhen, after dropping 6.6 percent yesterday. The company’s foreign-currency denominated B shares tumbled 8 percent. Poly Real Estate Group Co. fell 1.5 percent after slumping 8.5 percent in Shanghai yesterday.
More than 90 percent of the 42 major Chinese cities tracked by SouFun Holdings Ltd., China’s biggest real-estate website owner, posted a decline in property sales last week from a year earlier, according to a statement today.
The growth in prices for new homes in China’s first-tier cities slowed in January, according to data from the statistics bureau yesterday.
Chinese banks had as much as 200 billion yuan ($33 billion) of mezzanine financing in 2013, accounting for 2 percent of the nation’s annual property investment, according to estimates from Huang Jie, a Beijing-based CICC analyst. Real estate mezzanine financing makes up 10 percent to 20 percent of annual property investment in the nation, with trust companies and private equity funds contributing the most, Huang said.
Mezzanine financing in the property industry involves giving a loan to a developer while an affiliate of the bank buys a stake in the firm and sells it back at a later date. The deals are often structured in a way that makes them look like equity investments rather than loans.
“The move is to optimize credit allocation and streamline asset structure to better service the real economy,” Industrial Bank said in yesterday’s statement. “Mezzanine financing accounts for a very small portion of our business, so the suspension will have no material impact.”
Chinese lenders are trying to contain nonperforming loans that have increased for nine quarters to the highest level since the 2008 global financial crisis, regulatory data as of Dec. 31 show.
Shares of Industrial Bank, in which Hang Seng Bank Ltd. owns an 11 percent stake, lost 1.3 percent to 9.00 yuan after falling 3.7 percent yesterday.
Industrial Bank, part owned by Hang Seng Bank Ltd., has been among the most aggressive in real estate and local government financing. Exposure to those two industries, including off-balance sheet financing, accounted for about a third of its total assets by the end of June, the second-highest among China’s publicly traded banks, according to CICC data.
At least 10 Chinese cities, many of them provincial capitals, have tightened local property prices since November, with major cities such as Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.
Some Chinese developers may default on their debt as property-trust loans worth about 350 billion yuan mature this year, according to Jefferies Hong Kong Ltd.
“Banks have tightened property loans since 2011 and that has already driven developers to other more expensive sources of funding,” said Du Jinsong, a Hong Kong-based analyst at Credit Suisse Group AG. “There’s huge uncertainty on the property market now because it’s stuck in the worst-case scenario: the market isn’t doing great, but neither is it doing badly enough to warrant government help.”
Industrial Bank may also restrict funding to local governments that rely on less-regulated financing, according to Huang at CICC.
The move “is mainly attributable to falling risk appetite rather than regulatory guidance,” Huang wrote in a research note yesterday. “We do not rule out that it will likely tighten financing related to local governments in the future.”
— With assistance by Jun Luo