| HONG KONG, July 16
HONG KONG, July 16 China's shadow banking firms
slashed lending to property developers in the first half of this
year, closing off a crucial funding avenue just as the housing
market cools, potentially spelling trouble for the sector and
the broader economy.
Trust companies, which pool money from rich people and
companies to make high-interest loans and are part of the
China's vast and opaque shadow banking system, were a ready
source of cash during the housing boom, particularly for smaller
developers that had trouble borrowing from banks.
But in the first half of this year, trusts lent real estate
firms 39 percent less than in the previous six months, according
to trust research company Use Trust based in Nanchang. At the
same time, the average interest on 48.3 billion yuan ($7.78
billion) in loans made through wealth management products
climbed 16 basis points to 9.67 percent.
That bodes ill for Chinese developers who must repay nearly
600 billion yuan ($96.83 billion) worth of trust loans next
year, according to brokerage firm Jefferies.
"Default risk is heightening because trusts rely heavily on
house prices rising," said Xie Ya Xuan, an economist at China
Merchants Securities' Research and Development Center in
Trust firms, under greater scrutiny from regulators worried
about rapid growth of shadow banking, are both finding it harder
to raise money themselves and growing wary of lending to
developers, particularly smaller ones, while the market cools.
New home prices in China fell in June for the third straight
month, private sector surveys show, as some developers cut
prices to spur sales, with many expected to offer steeper cuts
as they scramble to meet 2014 sales targets.
That could squeeze developers with trust loans coming due in
the next 12 to 18 months as a supply glut clouds the outlook for
the property sector.
With its 15 percent share of China's economy and direct
impact on 40 other sectors, many economists identify a property
market downturn as the main risk to Beijing's 7.5 percent growth
target for this year.
Tightening credit conditions make it tougher for developers
to refinance and roll over their trust loans.
Total funding for real estate developers this year added up
to 4.7 trillion yuan at the end of May, up 3.6 percent from a
year earlier, according to the National Bureau of Statistics. It
marks a significant slowdown from a 32 percent growth in the
same period of 2013.
"If the trust loan can't be rolled over, then the company
will be in trouble," said an executive at a Hong Kong-listed
developer who declined to be named.
While trusts are cutting their exposure to small developers,
they appear to be ramping up loans to bigger companies.
Evergrande Real Estate Group Ltd, ranked as
China's third largest developer by sales in the first six
months, raised 3.3 billion yuan by July 7 via trust loan
products for its projects this year, according to Use Trust.
Evergrande declined to comment.
Trust companies said they have become more selective over
real-estate related refinancing projects and they prefer
infrastructure investments over property as they are usually
backed by governments.
"We basically don't do developers smaller than provincial
level or small to mid developers anymore," said a trust manager
at Minmetals International Trust Co Ltd, who declined to be
named as he was not authorized to speak to the media.
Bigger is not necessarily safer. Because these project loans
are classified as equity rather than debt, they can make a
company's balance sheet look healthier than it is. Barclays
pointed out in June that Evergrande's total debt-to-equity ratio
would be a steep 220 percent if all its funding sources were
counted as debt.
"We believe the company is over-leveraged, especially with
regards to its perpetual securities products, and this may bring
in a painful punch should sales continue to slow," Barclays
analyst Alvin Wong wrote in a note to clients.
Trust loans came into the spotlight this year after several
delayed payments and defaults.
Last month, China Ting Group Holdings said it was
unable to receive two interest payments for its HK$200 million
($25.81 million) entrusted loans to Hangzhou-based developer
Zhongdou Group, who was reportedly in 2 billion yuan debt. A
Jiangsu shipbuilder also said in April a 105 million yuan
entrusted loan to a Nanjing developer was defaulted.
($1 = 6.1994 Chinese Yuan Renminbi)
($1 = 7.7501 Hong Kong Dollars)
($1 = 6.2075 Chinese Yuan)
(Additional reporting by Umesh Desai and Hongmei Zhao; Editing
by Emily Kaiser and Tomasz Janowski)