Property groups’ bank stakes stir unease among Chinese regulators

06/04/2014

Chinese property companies are buying stakes in banks and raising fears that the country’s already stretched developers are trying to cosy up to their lenders.
Ten Chinese property companies have invested Rmb18.4bn ($3bn) in banks, according to the Financial News, an official newspaper published under the aegis of China’s central bank.

Some of the developers are heavily indebted, sparking questions about the motivation for these deals, and specifically whether the property companies are hoping to use their links to the banks to obtain preferential financing.
In a sign that regulators may be getting uneasy, the Financial News late last month warned developers not to expect any special treatment from their banking partners.
“Whether from the perspective of the banks or regulators, as soon as a property company becomes a bank’s shareholder, their business dealings will become related-party transactions, and so will be controlled and supervised more closely,” the newspaper said.
Falls in housing sales across China at the start of this year and defaults by a handful of small developers have stirred fears about the risk of a major property market downturn. Worried about the potential damage, Chinese regulators have long tried to limit banks’ exposure to the property sector, placing caps on their lending to developers and home buyers.
There had been some cross-pollination between Chinese developers and banks in the past, with China Resources and Shanghai-based Greenland holding investments in both. But there is no precedent in China for the flurry of recent tie-ups.
Real estate companies including Vanke, Evergrande and Tian Tai have all purchased minority shareholdings in local banks over the past six months. Yuexiu Group, parent of Yuexiu Property, reached beyond mainland China to acquire Hong Kong’s Chong Hing Bank late last year.
Rating agencies have so far taken a cautious view of the deals, noting that property developers are hoping to see benefits but that the investments are still small in scale.
“We don’t think they [the developers] expect to get funding from the banks directly, but they will be looking for opportunities for mortgage financing for their clients or financing for their contractors,” said Kaven Tsang of Moody’s.
Developers have been active as cornerstone investors in some of the recent Chinese bank initial public offerings in Hong Kong, part of the wider trend of “friends and family” deals.
In the most recent such deal, Chongqing Tian Tai Real Estate invested $13.8m for a stake in Harbin Bank as part of its IPO last week.
Vanke, China’s largest listed developer by sales, became the biggest single investor in Huishang Bank when it took an 8 per cent stake in its IPO last October. Yu Liang, Vanke president, said it made the deal “to better meet its customers’ demands for financial services”.

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