Analysis: Greentown woes reveal risks in China property boom

By Soo Ai Peng and Charlie Zhu

HANGZHOU/HONG KONG (Reuters) - China is moving to choke off funding avenues to developers across the country, tightening or eliminating credit options in a bid to slow the rampant property market and bring down prices without sending the broader economy into a crash.

The latest salvo in Beijing's battle to rein in the sector came last week, when the banking regulator ordered trust firms to detail their exposure to debt-laden Greentown <3900.HK>.

The company, based in the popular Chinese tourist city of Hangzhou, specializes in luxury property development around the country.

China has already imposed home-purchase restrictions on about 40 cities as part of nearly two years of efforts to cool prices that have risen far beyond the reach of ordinary Chinese.

But regulator's move last week stoked concerns of a funding squeeze for the sector and sparked a selloff in shares and bonds in many other Hong Kong-listed Chinese developers.

Many of these developers are highly geared and had relied on trust loans as a key source of financing in the absence of other channels of funding.

"The double whammy of slower sales since end-August and higher interest costs has likely sparked increasing concerns on liquidity of Chinese developers, which is likely to further deteriorate if sales slow further," Mirae Asset Research said in a report.

The average interest costs of Hong Kong-listed Chinese developers rose 64 percent year on year in the first half, Mirae said based on the companies it tracks.


Beijing wants to push developers to lower prices and sell down their inventories, so it is turning the screws on trust financing -- choking off what has been a lifeline for many of the country's smaller developers such as Greentown.

The form of financing, more expensive than ordinary loans, has been booming.

Chinese trusts poured over 210 billion yuan ($32 billion) into the sector in the first half. Total outstanding property trust loans exceeded 600 billion yuan.

The China Banking Regulatory Commission scrutiny of Greentown's lenders highlighted Beijing's determination to bring down housing prices that it views as a threat to social stability and economic growth.

It also raised the risks of investing in what used to be China's best growth story, analysts said.

Indeed, the market may well be at a turning point, with grave consequences for smaller developers around China.

The restrictions on homebuying and the heavy credit clampdown on buyers and developers seem to be showing some impact in major Chinese cities.

Housing inflation has shown signs of peaking, easing a touch in August, with home prices in major cities remaining flat for a second consecutive month.

"The banking regulator has been tightening real-estate trust financing. It should only get tighter," said a senior executive at a Chinese trust company. The executive declined to be identified because he is not authorized to talk to the media.


Sky-high housing prices undermine Beijing's goal of making its economic growth more sustainable, making it more reliant on domestic consumption and less on exports.

A more healthy and affordable property sector would unleash real demand and so provide support to dozens of other industries from appliances to furniture.

Therefore Beijing is unwilling to see a meltdown of the sector, which would destabilize its financial system, analysts say. What it hopes to see is a soft landing of the market.

"I don't believe the state will keep adding pressure to the property sector until it collapses," Greentown CEO Shou Biannian told Reuters on Thursday.

Greentown is one of the more stark examples of the crunch.

The company had amassed total debts of 34.6 billion yuan at end-June -- almost 40 percent of it maturing in 12 months -- and 5 billion yuan of its liabilities related to trusts.

Its net gearing ratio of 163 percent, the highest among Hong Kong-listed Chinese developers, resulted from an aggressive, debt-driven expansion in the past few years' heyday of the China property market boom.

It now suffers negative cashflow, Greentown earnings figures show.

At the sales office of Sincere Garden, an upscale residential project developed by Greentown, salespeople in grey uniforms politely show a few prospective buyers a sprawling model of a compound consisting of more than a dozen high-rises.

Outside the fancily decorated sales office, a few trucks rumble in and out of a vast, dusty construction site in the outskirts of Hangzhou, nicknamed heaven on earth for its picturesque West Lake.

"How can we possibly sell a few units in a day when you have government controls and purchase restrictions?" a saleswoman complained to one viewer.

Shou said he had no plans to cut sale prices now, although the company was set to miss its 2011 sales target of 54 billion yuan as it had only completed half of that so far this year.

At Sincere Garden, there have been far fewer buyers since the purchase restrictions kicked in earlier this year, although three quarters of the development slated for completion in 2013 had already been sold, the saleswoman said.

Average selling prices had gone up to 36,000 yuan ($5,636) per square meter, up from 29,000 yuan two years ago when it was launched.

Analysts expect Greentown's woes to spread to other developers. Its shares plunged 17 percent on Thursday alone, hitting a 28 month low.

With the credit tap tightened further and funding costs soaring, Chinese developers, especially smaller, indebted ones, are expected to cut or delay project construction and lower sale prices to stay afloat, bankers and analysts say.

"The cash position of the companies should allow them to sustain for another six months. If worse comes to worse, they can cut construction and then prices," said Jacphanie Cheung, director of Asia Credit Research at Deutsche Bank.


China has banned developers from accessing the domestic stock and bond markets. Domestic banks are also increasingly cautious about lending to developers, especially small ones.

Even for big developers such as China Vanke <000002.SZ> and China Overseas Land <0688.HK>, lending terms are getting tougher, bankers said.

Some banks no longer extend credit unless borrowers provide sufficient collateral. And normally the loan they extend won't exceed 40 percent of the value of collateral a borrower provides.

Chinese developers are virtually shut out of the overseas loan, credit and equity markets as Beijing has banned mainland companies from acting as a debt guarantor for their overseas units, and buying interest in Chinese high-yield dollar bonds has evaporated in light of a deepening European debt crisis.

Chinese developers have raised nearly $9 billion in offshore bonds and $2.39 billion in offshore loans so far this year, nearly all in the first half.

Meanwhile, offshore funding costs have been surging. A typical three-year loan for a medium-size Chinese developer is now quoted as high as 600 basis points (bps) all-in, compared with 400 bps early this year.

The situation is similar in the bond market.

Skyfame Realty (Holdings) Ltd <0059.HK> this month agreed to issue HK$200 million in bonds due 2013 with a 20 percent yield to fund working capital, pay up a shortfall in registered capital of one of its project companies and repay loans.

The yields are much higher compared with earlier this year.

(Additional reporting by Kane Wu and Foster Wong of Basis Point in HONG KONG, Nethelie Wong of IFR in HONG KONG, and Hongmei Zhao and Xiaoyi Shao in BEIGING; Editing by Brian Rhoads and Vinu Pilakkott)