Credit to China’s Developers Tightened as Bank Stops Property Loans

China’s real estate developers came under increasing financial pressure recently as the country’s seventh largest bank cut off credit to the sector, and reports indicate that several other banks may be following suit as the nation’s banks become more cautious about lending to property projects.

According to a report in the official Shanghai Securities Journal, China Industrial Bank Co., Ltd has suspended “mezzanine financing in the real estate sector” and “financial business in the property supply chain.” The Fujian-based bank continues to grant mortgages to individuals.

There were also rumors in the market that the Bank of Communications, China Merchants Bank, China CITIC Bank and Bank of Agriculture had also begun scaling back property-linked loans.

China Industrial Bank, which belongs to the Fujian provincial government, has been among the most aggressive of China’s large banks in lending to the real estate sector both on and off its balance sheet.

Default Risks Seen Increasing

This month the Hong Kong branch of investment bank Jefferies warned that some Chinese developers may default on their obligations, as trust products worth approximately RMB 350 billion are due to mature this year.

Government media reported earlier this month that Jilin Province Trust Co Ltd had failed to repay investors for $126 million worth of trust products which matured in recent weeks, and in January China averted its first trust default in at least a decade as investors in a RMB 3 billion high-yield product issued by China Credit Trust Co. were bailed out days by the government.

Trusts Cut Off as Risks Rise

The mezzanine financing is a reference to the off-balance sheet equity trusts commonly arranged by banks in China to provide developers with short term financing for real estate projects which are already underway, but are not yet able to begin selling units to buyers.

Typically, the trust companies purchase a majority of equity in the project company, and the developer then buys back the shares in the company when the trust reaches maturity. The practice is part of what is commonly referred to as the country’s shadow banking industry and lends at high interest rates to companies and projects that are unable to secure traditional bank loans.

Estimates from Beijing-based investment banking and research services company China International Capital Corp, put mezzanine financing at up 10 to 20 percent of annual property investment in the nation, with the bank estimating the size of the investment sector at RMB 200 billion ($33 billion) last year.