China Adds Property Support With M&A Funding, Bank Rate Cut

(Bloomberg) -- China is ramping up support of the embattled real estate sector as growing stress in the industry threatens to deepen an economic slowdown.

Authorities are encouraging banks to fund acquisitions of projects of distressed developers and pushing financially healthy property firms to make such purchases, the central bank-backed Financial News reported Monday.

China is also providing credit support to an economy showing strain from the property slump, with domestic banks on Monday lowering borrowing costs for the first time in 20 months. The move follows action by the People’s Bank of China earlier this month to cut the amount of cash banks must hold in reserve, freeing up 1.2 trillion yuan ($188 billion) of cheap long-term funds for lenders.

The support measures come as some developers such as Kaisa Group Holdings Ltd. and China Evergrande Group struggle to sell assets to raise cash and service mounting debts amid a crackdown on leverage in the industry. Regulators have eased up on the clampdown in recent weeks, such as by encouraging stronger real estate firms to tap the onshore interbank bond market for financing. 

Lenders will be urged to help “quality” developers acquire projects of large real estate firms faced with difficulties, the Financial News report said, citing a notice from the central bank and the nation’s banking regulator. 

In a sign that the M&A funding policy isn’t designed to bail out indebted developers, the report cited an unidentified regulatory source as saying that the measure is only designed for the acquisition of real estate projects, rather than the takeover of entire companies.

“The aim of this policy is to resolve property projects of stressed developers, especially those that might see construction halted,” said Yan Yuejin, research director at Shanghai-based E-house China Research and Development Institute. “Bank loans and bonds for such M&A may accelerate notably.”

Chinese banks lowered the one-year loan prime rate, considered the de facto benchmark funding cost, on Monday, but kept the five-year loan prime rate, a reference for mortgages, unchanged. The differentiated move is in line with authorities’ stance that “homes are for living in, not for speculation,” Hongta Securities Co. Chief Economist Li Qilin wrote in a report Monday.

The CSI 300 index of Chinese real estate shares rose 0.7% at 2:31 p.m. in Shanghai. Still, distressed developers fell, with Kaisa tumbling as much as 15% in Hong Kong after resuming trading for the first time since it was deemed a defaulter earlier this month. Sunac China Holdings Ltd. dropped as much as 18%, a record intraday decline.

Held Meeting

The Financial News report also said the PBOC and the country’s state-asset watchdog held a meeting recently with some large private and state-owned real estate companies to encourage them to acquire quality projects from distressed developers.

Financial authorities have asked lenders not to “blindly” call back or cut off loans to struggling developers, it added.

The PBOC didn’t immediately reply to a fax seeking comment.

Highly leveraged developers will look to dispose of assets and this present opportunities for onshore capital, investment and fund managers, according to Jones Lang LaSalle Inc.’s Asia-Pacific Chief Executive Officer Anthony Couse.

“The Chinese government will look with that controlling hand to support some of those developers as they divest assets to meet payments and look at corporate restructuring,” Couse said Monday in an interview on Bloomberg Television.

Sunac, the nation’s fourth-biggest builder by sales, recently sold two real estate projects to rival Hangzhou Binjiang Real Estate Group Co. as part of efforts to recoup cash.

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With assistance from Bloomberg