[ET Net News Agency, 9 July 2019] China's latest steps to curb debt financing for
developers are aimed at cooling land costs and deterring a parallel surge in home prices
further down the road, said S&P Global Ratings.
Regulators have moved to slow the growth in trust financing, a common funding channel
for property developers. And S&P expects more regulatory measures to emerge over the next
six to 12 months on either an official or unofficial basis.
"By focusing on trust financing, regulators are effectively targeting aggressive
developers that have been pumping up their land banks and causing price hikes at
auctions," said S&P's credit analyst Aeon Liang. "While further measures are probable,
these are likely to be fine-tuning of existing regulations rather than large-scale
actions."
Bond issuances in recent weeks indicate regulations so far this year have not led to a
blanket halt to fundraising. That's because regulators have opted for a calibrated
approach to cool the market. For example, the China Bank and Insurance Regulatory
Commission issued Directive no. 23 in May to increase regulations on financing activities
and tighten financial risk management.
And the National Association of Financial Market Institutional Investors provided
"window guidance" in June 2019, which media reports suggest led some developers to suspend
bond issuances.
These measures followed a surge in land prices in some tier-two and upper-tier-three
cities in recent months, with hikes often reaching more than 25% at auctions.
Small and aggressive developers are more likely to use trust financing because of their
limited access to other fundraising channels. Under the most-recent guidance, regulators
would like individual trust companies to self-impose limits to their growth, cap the scale
of outstanding financing at their existing scale, or completely stop any new funding.
In June 2019, total trust financing for the property sector declined by about 11% month
on month to RMB62.3 billion (US$9.1 billion), following Directive no. 23.
The credit rating agency still forecast moderate growth in residential sales for 2019,
mainly driven by a rise in the average selling price. Recent regulatory measures affect
only a limited cohort of developers and are focused on land financing. As such, supply and
demand for property won't be impacted.
"The credit profiles of rated developers may diverge as regulations bite. Larger-scale
companies are likely to benefit because they have their better financial flexibility.
Smaller developers with slim land reserves and less-established financing channels could
face increasing liquidity and refinancing risks, given their pressure to buy land," said
Liang. (KL)