MNI EXCLUSIVE: China Property Hotspots May Draw More Curbs

More Chinese cities with rising home prices may tighten rules as Beijing cracks down on speculation to contain asset bubbles although local authorities, wary of systemic risk in the real-estate industry, could step in to help major developers facing a liquidity crunch, advisors said.

In its first major property market measure after introducing leverage metrics for developers in August, the central bank in December capped banks' property lending against their total loans, prompting some lenders to tighten loan quotas, delay lending or raise interest rates for home buyers.

While Shanghai and Shenzhen have recorded sharp house price gains following monetary easing and discounts from indebted developers, data shows other emerging hotspots. Prices in the city of Yangzhou in Jiangsu province, which is close to Shanghai, rose 0.8% m/m in December, the most among 70 large and medium cities, latest data from the National Bureau of Statistics showed. Yangzhou recorded the highest monthly price gains in both October and December, said Yan Yuejin, director of E-house China Research and Development Institution. According to Yan, a city is considered to have an overheated property market if house prices rise over 1% on a monthly basis.

In a bid to close loopholes contributing to the surge, Shanghai has cracked down on the practice of couples faking divorce to bypass mortgage and purchase limits. The government has also increased supervision by sending ministry-level officials to Shanghai and Shenzhen to monitor the market.

"Other cities are likely to tighten regulations if they see a rapid rise in housing prices, as the Chinese government is resolved to keep the market in check," said Qin Hong, a former director of the Policy Research Center at the Ministry of Housing and Urban-Rural Development and now the director of the Urban Renewal Research Center at the National Academy of Development and Strategy.

GROWING DEMAND

"It may take about half a year for the reinforced regulation to deflate bubbles though home prices in Shanghai and Shenzhen could keep rising for a while," said a government-back think tank researcher who asked to remain anonymous.

Shanghai home prices are driven by growing demand amid declining supply of residential land, the researcher said. The city's talent-attraction policy that allows migrants to become residents and qualify for home purchases is also a factor.

Still, the overheated housing market in major cities is a boon for developers whose financing is still restricted by the "three red lines" – leverage metrics that they cannot exceed in order to borrow.

According to the Beike Research Institute, Chinese developers will have over CNY1.2 trillion in maturing debt this year, an increase of 36% y/y. Though default risks have increased amid tightening financing conditions, both advisors believe many developers have non-traditional ways to manage their debt.

More developers are turning to supply chain financing and asset-back securitization, the researcher said. Spinoffs followed by listing or merger and acquisition deals are also among the options, Qin added.

According to a Moody's report, rated developers issued $11.5 billion of offshore bonds as of Jan. 26, down 30% y/y but robust compared to the $4.4 billion average monthly issuance last year. Meanwhile, their onshore issuance rose by 72% to CNY20.2 billion in the same period.

"Provincial governments will help to stabilize the operations of major local developers to prevent systemic risks," said Yan.

In early January, R&F Properties pledged part of the equity in three subsidies with Guangzhou City Investment Company Ltd., a local government financing vehicle directly controlled by the Guangzhou government. It is the second private developer that the LGFV has tried to help after becoming an investor in indebted Evergrande Group last year.

Allowing local SOEs to hold shares of developers with temporary difficulties avoids moral hazard and intervention in the company's operations while offering large funding support, Yan added.