China’s CBRC Warns on Using M&A Loans for Land Grabs

China’s banking watchdog is clamping down on lending for land deals in Shanghai, amid a central government campaign to deleverage the property sector. A circular recently issued by the Shanghai branch of the China Banking Regulatory Commission (CBRC) has warned banks to comply with restrictions on real estate lending, according to reports.

Loans for mergers and acquisitions in Shanghai have grown rapidly, and a significant number of them are channelled into acquiring building sites, the regulator said. The notice issued on January 24 reminds banks that using this capital to buy land violates the Guidelines on the Risk Management of M&A Loans of Commercial Banks issued by the CBRC in 2015.

CBRC Targets Debt-Fuelled Land Acquisitions

The circular stipulates that banks must ensure loans are not used in transactions where land is the main underlying asset, according to an account by the South China Morning Post. In addition, M&A lending cannot be used for property projects in which less than 25 percent of the budgeted investment has been completed. Associated lenders and borrowers must also be disclosed when funds from M&A loans are used to acquire stakes in property companies.

The CBRC further warned banks not to lend to property projects without the required permits for land use, planning, construction and pre-sale. Loans may not be extended to projects that have not paid the full amount of land acquisition fees, in order to prevent banks from financing land purchases indirectly, the directive says. Chinese law forbids using borrowed funds to purchase land at government auctions.

Banking Watchdog on Anti-Leverage Drive

The CBRC notice forms part of the regulator’s campaign to maintain financial stability by stemming the mounting tide of debt in the real estate sector. China’s property developers are scrambling to refinance their debts after spending a record RMB 646 billion ($103 billion) in 2017 buying up competitors or their assets in the country, according to Bloomberg data. Mainland homebuilders China Evergrande Group and Sunac China have emerged as the kings of leverage, with net debt-to-equity ratios of 240 percent and 394 percent, respectively, as of last September.

In July, the CBRC verbally instructed commercial banks to review their credit exposure to Tianjin-based Sunac, prompting China Construction Bank to freeze the sale of a Sunac financial product and cancel a RMB 1.5 billion ($222.1 million) trust loan to the firm. The banking watchdog also targetted Dalian Wanda Group, HNA Group and Fosun, among the mainland’s most prominent overseas investors, asking financial institutions to review borrowing by the conglomerates and report on any potential dangers.