Property Trust Sales Drop 49% as Vicious Loop Seen: China Credit

Chinese developers raised 49 percent less through trusts in the first quarter as the collapse of Zhejiang Xingrun Real Estate Co. highlighted default risks.


Issuance of property-related trusts, which target wealthy investors, slid to 50.7 billion yuan ($8.16 billion) from 99.7 billion yuan in the fourth quarter, data compiled by Use Trust show. The yieldon AA rated five-year bonds has climbed 175 basis points in the past year to 7.23 percent, according to Chinabond. That compares with 2.74 percent on corporate securities globally, Bank of America Merrill Lynch indexes show.

“The banking system and the shadow banking system are becoming concerned about exposure,” David Cui, China strategist at Bank of America said in an interview yesterday. “Once people refuse to provide credit to developers, their balance sheets will be under pressure, forcing them to cut prices. Once enough of them cut prices, fewer people would buy because most people buy property only when they think the price is going up. If this persists, it will turn into a vicious loop.”


The collapse of Xingrun, a builder in a city south of Shanghai, with 3.5 billion yuan in liabilities last month is adding to concerns as developers grapple with trust repayments equivalent to the size of Puerto Rico’s economy this year. Agricultural Bank of China Ltd., the nation’s third-largest lender, last week alerted its branches about risks from property lending, according to two people familiar with the matter.


Value Falls


New property trust offerings accounted for 30 percent of total trust sales in the first quarter, down from 33 percent in the last three months last year, according to data compiled by Use Trust. Figures from the research firm are for collective products only, which are sold to more than one investor.


The value of homes in China sold in January and February fell 5 percent to 598.5 billion yuan from the same two months a year earlier, the statistics bureau said last month. It will become more difficult for builders to obtain financing in 2014, according to 26 economists and analysts surveyed by Bloomberg from March 24 to 31.


This year will probably be the most challenging for Chinese property companies since the short-term shock between 2008 and 2009 after the global financial crisis, according to Bank of America’s Cui. “There is high probability that some property trust products will default this year.”


More Failures


After Xingrun’s failure, China’s economic planning body expanded an annual property survey that helps shape policies to more than 300 cities. The National Development and Reform Commission ordered the survey be expanded to cities at the prefecture level and above, two government officials who asked not to be identified because they weren’t authorized to speak publicly said last month.


Companies with other kinds of building projects are also facing repayment concerns. A unit ofChina Sports Industry Group Co. (600158) failed to repay 144 million yuan of principal on a 600 million yuan trust loan for a sports center development, according to a statement from the company to Shanghai’s stock exchange dated April 4.


Speculation has increased that defaults may spread as the world’s second-largest economy cools. Policy makers have set a 7.5 percent growth target for 2014, which would be the slowest since 1990. Credit-default swap contracts insuring the nation’s debt against non-payment have climbed 5 basis points this year to 85 basis points, prices from data provider CMA show.


Bubble Risk


Premier Li Keqiang said the government will regulate the housing market “differently in different cities” to take into account local conditions. Jia Kang, director of the Ministry of Finance’s fiscal-science research institute, said on April 9 that China’s property bubble is “not big.”


While the decline in credit to the property sector will intensify the industry’s negative trend, only a few smaller developers may default on borrowings this year, according to Yao Wei, Hong Kong-based China economist at Societe Generale SA.

“Bubbles in some areas may be squeezed out,” Yao said yesterday. “There is low probability that it will lead to panic or systematic risks.”


Benchmark borrowing costs have risen with the yield on China’s 10-year sovereign note up 100 basis points over the past year to 4.46 percent. The premium investors demand to hold AA-rated similar-maturity corporate securities has climbed 7 basis points over the same period to 390 basis points.


Shadow Banking


“While the government is trying to curb shadow banking and investors are worried about credit risks of property companies, shadow-banking credit to the property sector will continue to shrink,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-biggest brokerage. “Property companies’ demand for capital is still strong even as borrowing costs rise.”


Mining and property trusts are among the products with the highest default risks, Li added.

Outstanding property trust products, including collective and single, totaled 1.03 trillion yuan as of the end of last year, accounting for 10 percent of all types of trusts, according to data posted on the website of China Trustee Association.


China is cracking down on its shadow-banking industry, where finance companies lend with less transparency, as inefficient allocation of capital slows economic growth and threatens social unrest.


Unless the government intervenes, both shadow banks and official lenders will provide less financial support to property companies, according to Bank of America’s Cui. At the moment, there is no strong sign that the central government will come out to support the real estate industry, he said.

“Both the economy and the financial system are relying too much on the property sector,” he said. “This is a systematic problem.”



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