Chinese developer debt market “frozen”

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Via Ifeng:

The original title: regulatory focus on banks across the board tighten the development of real estate financing to meet the “frozen” moment

“In recent years, various banks have received intensive checks from the regulatory authorities, and in the field of credit risk, the development of loans is the focus of the inspection.” The banking industry told China Securities Journal reporter that the regulatory authorities on the bank financial management funds into the real estate also found special tight. China Banking Regulatory Commission recently issued a document on the banking risk prevention and control, and carry out a series of special rectification, real estate risk has become the focus of investigation areas. A number of banks on the public credit business executives said that the current development of the loan business is not stagnant, but the overall contraction of the momentum is quite clear.

Supervise heavy blows out

China Banking Regulatory Commission in the first quarter of the economic and financial situation analysis will require bank funds irregular violation of the real estate sector. Industry insiders said that in the implementation level, the regulatory authorities caught particularly fine, do not miss any dead ends.

Guangdong, Zhejiang and other places of the banking sector on the China Securities Journal reporter revealed that the recent “three sets of benefits” (regulatory arbitrage, idle arbitrage, associated arbitrage) special governance work is the focus of real estate risk is the most important, focusing on checking the banking industry Financial institutions have not violated for the real estate “blood transfusion”. For example, whether credit funds are borrowed from the construction industry or other sectors to invest in the real estate sector, whether to provide financing to the real estate sector through interbank business, financial management or split into small loans.

Bank of China financial management registration center released last year, “China’s banking market financial market report (the first half of 2016)” shows that the first half of last year, a total of 18.99 trillion yuan of financial funds through the allocation of bonds, non-standard assets, equity assets, etc. To the real economy. Among them, to invest in the real estate industry funds about 2.09 trillion yuan, ranking second, accounting for 13.06%, second only to 14.21% of the civil engineering construction industry. Bank insiders admitted that the actual real estate into the field of financial funds may be larger.

A number of local banking regulators said that as a local banking regulatory authorities, for some national banks to issue financial products, the underlying assets can not be completely “penetrate”, many funds through financial management, management products “around the” Real estate, this year this will be the focus of regulatory investigation.

For the investigation of the irregularities, the banking sector punishments without hesitation. In January, the Shanghai Banking Regulatory Bureau issued a ticket of nearly RMB4.78 million from the Jiangsu Branch of Jiangsu Bank because the act of real estate company provided for the financing of land transfer payments. In March, Qingdao Banking Regulatory Bureau of Haier Group Finance Co., Ltd. issued a real estate loans illegally issued a 200,000 “ticket”. In April, Huaxia Bank Chongqing Jiulongpo branch due to real estate loan funds control is not in place by the administrative punishment.

Development loans were tightened

Regulatory authorities to make commercial banks to adjust the real estate development loan strategy. “We have been very cautious about the development of lending in recent years, the approval authority is also very dead, the local branch can be approved the development of credit is not high.” Agricultural Bank of China head office business people said. Minsheng Bank, a local branch of the relevant responsible person said: “Now the local branch does not develop loans, approval authority in the head office of the real estate business.

A number of joint-stock banks, said the current joint-stock banks, the development of approval authority to pay the head office is very common. Individual joint-stock banks to substantially shrink the real estate loan business and even stop the new business.

The shrinkage of the development loan is also reflected in the annual report of the listed bank 2016. Construction Bank in 2016 real estate loans balance 299.998 billion yuan, down 11.4998 billion yuan over the previous year, the proportion of real estate loans from 4.29% in 2015 to 2.91%. Bank of China will be the real estate industry and the excess capacity industry together as a key area of ​​risk control, 2016 real estate industry loans balance of 280.9 billion yuan, down 17.95% over the previous year. The industry is expected to develop a comprehensive contraction of the trend temporarily reversed. The latest disclosure of the central bank data show that a quarter of real estate loans by 1.7 trillion yuan, accounting for 40.4% of the increase in loans over the same period, accounting for less than the 2016 percentage of 4.5 percentage points. Among them, the real estate development loan balance of 7.54 trillion yuan, an increase of 7.4%, down 0.9 percentage points over the previous year; individual housing loan balance of 19.1 trillion yuan, an increase of 35.7% over the previous year down 1.1 percentage points.

Central bank investigation and statistics department director Ruan Jianhong said that as of the end of the first quarter, the banking industry real estate credit exposure of about 29.8 trillion yuan, accounting for 12.7% of the total assets of the banking industry. The future central bank will continue to actively guide the financial system with real estate regulation and control related work.

People close to the central bank of China Securities Journal reporter said that the proportion of real estate loans will become the central bank to assess MPA one of the important parameters.

Of course, the bank on the development of loans is not completely “blocked”, but to follow the national policy-oriented, there is pressure. Bank of Communications, a local branch, said: “The current policy for the development of credit control is very tight, but for the protection of housing is still strongly supported in the first quarter of our branch of the real estate loans are basically used in the protection of housing projects.” CBRC latest statistics show , As of the end of March, affordable housing project loan balance of 3.5 trillion yuan, an increase of 52.2%, an increase of 339.2 billion yuan over the beginning, up by 31.3 billion yuan.

Control the real estate financing business growth

In addition to the development of loans, the CBRC recently explicitly asked banks to real estate business loans, personal mortgage loans, real estate mortgage loans, real estate corporate bonds and other forms of real estate financing all into the monitoring range, regular real estate stress test. For the real estate financing accounted for a high proportion of large fluctuations in the quality of banking financial institutions, as well as real estate trust business increased, accounting for higher trust companies will be the focus of regulatory agencies at all levels.

Brokerage analysts believe that the banking sector will fully control the real estate financing business growth, so as to effectively prevent the risk of concentration.

According to media reports, the China Banking Regulatory Commission Trust Director Deng Zhiyi recently held a trust industry regulatory work conference, said credit risk is the main risk of trust assets, the actual risk level of the trust industry may be higher than the estimated. Since 2016, real estate trust business, coal, steel and other areas of excess capacity risk is more prominent, Xinzheng cooperation business risk of the problem of slow release of the problem is becoming more common.

This means that the real estate “blood transfusion” another important pipeline – real estate trust will also be subject to more stringent regulation. China Merchants Securities Research report that the developer capital chain index since the fourth quarter of 2016 has continued to tighten. As of the end of March this year, the index fell to 128%, the first time since the second half of 2015 fell below 130% of the “red line.”

International credit rating agency Moody’s said that this year’s developers will continue to tighten liquidity, which reflects the slowdown since the beginning of real estate sales and domestic bond issuance slowed down the situation.

Peering through the Chinglish I think we can surmise that the word “frozen” means regulators are tightening fast with special attention being paid to off balance sheet lending and opaque wealth products that fund realty development. From Bloomie earlier this week:

A $1.7 trillion source of inflows into Chinese markets has suddenly switched into reverse, roiling the nation’s money management industry and sending local bonds and stocks to their biggest losses of the year.

The turbulence has centered on so-called entrusted investments — funds that Chinese banks farm out to external asset managers. After years of funneling money into such investments, banks are now pulling back in response to a series of regulatory guidelines over the past three weeks that put a spotlight on the risks. Critics have blamed entrusted managers for adding leverage to China’s financial system and reducing transparency.

The banks’ withdrawals helped erase $315 billion of stock market value over the past six days and sent bond yields to the highest level in nearly two years, highlighting the challenge for Chinese authorities as they try to rein in shadow banking activity without destabilizing financial markets. While the government has plenty of firepower to prop up asset prices if it wants to, forecasters at Australia & New Zealand Banking Group Ltd. predict the selloff will deepen this year.

“We are seeing an exodus of funds,” said He Qian, a Shanghai-based portfolio manager at HFT Investment Management Co., which oversaw about 189 billion yuan ($27.5 billion) as of last year. He was one of about half-a-dozen asset managers and analysts who said banks have started scaling back their entrusted investments.

The arrangements have become an important part of China’s shadow finance system. When banks sell wealth-management products — the ubiquitous savings vehicles that offer higher yields than deposits — the firms sometimes farm out client money to entrusted managers such as hedge funds and mutual funds. The managers invest the cash in bonds, stocks and other securities, hoping to generate enough income to cover the banks’ promised returns to WMP clients — plus some extra for themselves.

…The China Banking Regulatory Commission has asked lenders to report the scale of their entrusted investments, including products issued by mutual funds, trusts, futures firms and brokerages. While the CBRC didn’t explicitly ban entrusted investments, it asked banks to submit reports on their businesses by June 12 and to rectify any irregularities involving high leverage, multiple layers of investment, or regulatory arbitrage by Nov. 30, according to a document obtained by Bloomberg News. It’s unclear as yet what banks will do with the money they withdraw from entrusted investments.

…“Banks are pulling out entrusted investments in both government bonds as well as corporate bonds,” Raymond Yeung, chief greater China economist at ANZ in Hong Kong. “That will put continued pressure on China’s yields.”

Money markets are still tightening:

Bond markets too:

China to slow in H2.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.