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Private Equity Hawks Circling China Property Developers

Caijing reports today on private equity firms' rising interest in China property developers.  The entry of PE players in China's property sphere supports the idea raised here last week that mainland property developers are in the midst of a cash crisis following the governments most restrictive lending directives to date. 

Where does this crisis come from?  As the article explains:

"...In practice, property developers often have several projects ongoing at any given time.  Some are already mature and waiting for sales.  Others however need one additional step of financing.  Property developers normally use the revenue stream from mature projects to pay mortgages while raising new funds to invest in those projects still in development"

宏观调控后,开发商从银行获得滚动开发资金的通道几乎被关闭。华夏银行风控部门的工作人员透露,2009年银监会曾颁布过“三个办法”,其中包 括《固定资产贷款管理暂行办法》。该文件对固定资产的贷款投放流程进行了详细的说明和严格的把控。2010年初,银监会要求各家银行组织学习该文件,严格 按照文件的要求进行固定资产贷款发放...。

Following [China's] macro-tightening measures, property developers are seeing banks all but close their usual channel for rollover development assets*.  An employee in HuaXia bank's risk-control department reveals that in 2009 the China Banking Regulatory Commission ['CBRC'] issued "The Three Methods" included a <<fixed asset loans management provisional methods>> This document  carried out a detailed description of fixed asset loans and suggested strict control measures.  In the beginning of 2010, the CBRC required every banking group to study this document and strictly follow its directives when issuing fixed asset loans....

Under Article 35 of that document, projects seeking loans of over RMB $5m or with a amount more than 5% of the projects total now require the appointment of a trustee to administer loans.  These trustees are strictly required to follow the "actual loan actual payment" principle.  That is, if a loan earmarked for a particular purpose is not used for that purpose then the trustee will decline to approve the funds and developers will not have  access to the cash.  Chinese property developers can therefore no longer  ‘拆东墙补西墙" (dismantle the east wall to rebuild the west wall)  by shuffling funds from one project to another.  

For property developers 左右为难 this increased oversight is hampering access to capital at a time when they already face rising costs from domestic and foreign lenders.  Besides narrowed lending channels developers also face declining revenue from their main consumers who are either not buying while awaiting further price falls or are prevented from buying by the recent lending curbs.   

Bloomberg and other sources reported today of a recent rumor in Southern Metropolis Daily that China may loosen curbs on third-home purchases.  This news was quickly quashed by the Ministry of Housing and Urban Developments who reiterated that existing curbs would be maintained (although their argument of wanting to increase housing supply is questionable at best) Despite this denial, I can not help but think that behind that rumor was a bit of fact and we will see some sign of a loosened policy within the next 4-6 weeks to prevent the housing markets from entering a state of total freefall.  Too many consumers are worried about their home investment and one has to think that the political connections of mainland property developers are not without consequence.  There is a growing sense of anticipation amidst Chinese financial commentators that the recent tightening measures have been too effective and a slight loosening might be in order.

I'll explore this in more detail over the coming days.