China Said to Crack Down on Property Financing Through Trusts

  • Authorities are intensifying campaign to curb financial risks
  • Shanghai property stocks fall as analyst sees negative impact

China’s banking regulator has instructed trust companies to rein in funding to the nation’s booming real estate sector, intensifying a campaign to curb risks in both the property market and the shadow-finance industry.

The China Banking Regulatory Commission’s guidance covered real estate and other industries facing overcapacity, according to people familiar with the matter. The CBRC will take action against disguised property financing by the 20 trillion yuan ($2.9 trillion) trust industry, including lending through partnerships, asset management plans or related businesses such as suppliers, the people said.

The directive adds to a flurry of measures in recent weeks aimed at tackling what many analysts see as the biggest threats to financial stability in China: an overheated housing market and an expansion of funding via lightly-regulated asset-management products. The challenge for authorities is to rein in risks while avoiding a major economic downturn before a key Communist Party leadership reshuffle at the end of this year.

"Trusts are one of the few financing channels that are still viable for property firms,” said Liu Dongliang, senior analyst at China Merchants Bank Co. “The CBRC’s requirements may further limit this channel and will have negative impact on the real estate industry.”

Shares Drop

The Shanghai Stock Exchange Property Index fell 0.3 percent on Friday, while the benchmark Shanghai Composite Index was little changed.

To take froth out of the property market, regulators have sought to both cool demand from buyers and close fundraising channels used by developers. Despite the curbs, home values nationwide jumped 11 percent in December from a year earlier, the most in more than six years, and momentum hasn’t tapered off this year, according to official data compiled by Bloomberg.

While the CBRC views the overall situation as being under control, the regulator told companies to control the size of real estate trusts in major cities, closely monitor property trends and operating conditions of big property companies, said the people, who asked not to be identified because the matter isn’t public. The CBRC will study ways to monitor liquidity risks of trust companies, the people said.

Trust Loans

The CBRC believes some trust companies have been circumventing rules, adding to the leverage of securities investment trusts and providing financing to property developers in illicit ways, the people said. The regulator will prevent cross-holding financial risks in the trust industry and require trust firms to simplify their product structure and improve disclosure, they said.

“Regulators don’t want to see developers adding leverage,” Li Liuyang, a Shanghai-based market analyst at Bank of Tokyo-Mitsubishi UFJ (China), said by phone. “Investment growth will slow,” he said, adding that solid economic data in the first quarter have given regulators the confidence to tighten curbs.

A press officer at the CBRC in Beijing didn’t immediately respond to a request for comment.

Policy makers have already taken several steps to rein in non-traditional sources of financing for the real estate market. Property-related private equity investments with asset management plans in cities with “excessive” home price gains were suspended by the Asset Management Association of China in February. Private equity lending to developers for land purchases, working capital loans without specific purposes, or “illegal activities” including supporting institutions’ down payments were also banned.

Earlier this month, the CBRC also issued risk management guidelines for lenders that included a section on wealth-management products, which operate similarly to trusts. The regulator said the products should be simple and transparent, avoid excessive leverage and invest in distinct assets -- rather than pooling funds with other WMPs. Banks should only steer customers into products that are appropriate for their risk tolerance, the CBRC added.

Data from the central bank on April 14 showed that off-balance sheet lending by banks surged by a record 2.05 trillion yuan in the first quarter, with trust loans rising by 734.9 billion yuan.

— With assistance by Dingmin Zhang, Emma Dong, Jun Luo, Heng Xie, Jessica Zhou, Amy Liu, and Ling Zeng

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