Chinese Property Developers Confront Stark Capital Drought

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Chinese property developers confront a severe liquidity crunch as both domestic and overseas financing channels dry up, compelling many to shift from bond issuance and bank loans to borrowing via trust companies.

Market observers have expressed concern that the scarcity of capital access could create major refinancing risk for Chinese property developers, in particular smaller-scale concerns.

The squeeze on financing channels for property developers commenced in October last year, and encompassed domestic bonds, issuance of H shares, bank loans, as well as private fund-raising.

Data from Haitong Securities indicates that bond issuance by property developers began to shrink in Q4 2016, when total issuance fell by a third compared to the preceding quarter to 121 billion yuan.

Since 2017 no A-share developers have issued corporate bonds, as compared to the 77.433 billion yuan raised by 43 listed property concerns during the same period last year.

In February the Asset Management Association of China issued the “Securities and Futures Institutions Privately Raised Asset Management plan Filing Regulatory Standardisation No. 4 – Privately Raised Asset Management Plan Investment in Property Development Enterprises and Projects,” stipulating that it would suspend filing for standard residential projects in 16 hotspot cities where property prices had risen excessively.

After cracking down on domestic financing sources for property developers, regulators have now restricted their access to the overseas bond market.

Domestic sources recently reported that regulators had virtually suspended approvals of overseas bond issuance by property developers, after they piled into the instruments as other avenues of capital dried-up.

Overseas bond issuance by property developers posted a sharp surge in Q1 2017, while a report from China Information Real-estate Corp indicates that in March property developers issued a total of 30.228 billion yuan in notes and bonds overseas.

This accounted for 74.95% of total note and bond issuance by developers, as well as was equal to 3.25 times the value of loans they obtained from banks.

This prompted a vigorous response from regulators, causing Q2 overseas debt issuance by property developers to plunge to a three year low of USD$1.745 billion.

Property developers expected to turn to trust loans to raise funds

As regulators shut off all other financing channels, Chinese property developers are turning to loans from trust companies to raise funds.

Data from Usetrust.com indicates that since the start of the year 68 trust companies have issued a total of 326 real estate trust products for a total amount of 100.55 billion yuan.

These figures have shown an overall upward trend as regulators have tightened their squeeze on other fund sources, with the number of products issued for January, February, March and April totally 50, 54, 113 and 92 respectively, for amounts of 17.12 billion yuan, 16.98 billion yuan, 29.28 billion yuan and 25.81 billion yuan.

This trend has continued into May, with real estate developers having raised 11.37 billion yuan via trust plans thus far this month, and 24 trust companies issuing 39 assembled funds trust products in the week of 13 – 19 May alone.

The increased use of trust companies by real estate developers could create problems for the sector, which is considered a key part of Chinese shadow banking.

Real estate operations have always been a major source of default issue for trust company products. As of the end of 2016 the sector-wide real estate risky asset balance for the trust sector was 38.2 billion yuan, comprising 32% of all risky assets in the sector, and an increase of 0.02 percentage points compared to the start of the year.

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