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China Developer Shares Jump on Prospects of Easier Funding

China Developer Shares Jump on Prospects of Easier Funding

Shares of Chinese real estate developers rallied on Thursday, following reports that regulators may ease restrictions on their access to pre-sale funds and as lenders cut borrowing costs. 

A Bloomberg Intelligence gauge of mainland and Hong Kong-listed developers jumped as much as 4.1%, set for a third day of gains. Sunac China Holdings, Logan Group Co. and Shimao Group Holdings all surged more than 10%.

Chinese lenders cutting the five-year loan prime rate on Thursday, a benchmark for long-term loans including mortgages, also supported developers. The one-year rate was also lowered.  

Here are what analysts are saying about the potential easing of funding restrictions and the cut in loan prime rates: 

Bloomberg Intelligence

  • Developers will benefit as the LPR cuts could lower their funding costs, especially as many developers have sizable amount of bank loans, analyst Patrick Wong says
  • Lower mortgage rates will also support housing demand

Shenzhen Enjoy Equity Investment Fund Management Co.

  • Low valuation sectors like property, banks and consumers may experience bigger boost from policy easing, fund manager Li Xuetong says
  • Giving developers on the brink some breathing space will also help improve banks’ assets
  • It’s a good idea to go slow on the 5-year LPR cut as the authorities would want to take things one step at a time without depleting their tool box

Citigroup 

  • The potential easing will likely be executed at the local level on a case-by-case basis without a formal announcement, according to analysts including Griffin Chan
  • The windows to implement the new rules could come late January before the Lunar New Year, and mid-March after the NPC annual meeting; the sector could see a better 2022 versus 2021 given more policy clarity since December
  • News to have positive impact on share prices; Citi’s top picks include China Resources Land, Longfor, CIFI, Logan

Jefferies

  • The potential new rule on escrow funds is one of the last things the government can relax, and should give a clear direction to local governments on their implementation, analysts including Stephen Cheung write in a note
  • Escrow funds account for 30-50% of developer’s pre-sales, thus a easing on the usage will ease property developer’s short-term liquidity
  • However, “it would be hard to form a persistent near-term uptrend until the news is confirmed given the fragile investor sentiment.”

CGS-CIMB 

  • The potential new rule, if implemented, will release about $12 billion for 17 developers that CGS-CIMB covers, allowing them to pay short-term debt, says CGS-CIMB analyst analysts including Raymond Cheng
  • The news would be a near-term positive for the sector as eased rules could free up a meaningful amount of funds to developers: CGS-CIMB
  • CIFI, KWG, Logan and Times -- firms that have medium liquidity risk --  to be key beneficiaries of the new rule, if implemented

©2022 Bloomberg L.P.