Tightening measures over the past year had been aimed at choking off credit flows to poorly managed developers in China’s unruly housing market.FREDERIC J. BROWN
Chinese officials have begun privately applauding the financing problems being experienced by the country's bloated property sector. They hope this will let off steam and help prevent a dramatic bursting of a property bubble.
Investors have reacted with alarm to signs that Chinese developers are struggling to fund their operations -- fearing it could presage a collapse of the sector.
This would have repercussions for the whole Chinese economy and hit one of the last remaining sources of growth for the stuttering global market.
Two officials and a senior banker told the Financial Times that tightening measures over the past year had been aimed at choking off credit flows to poorly managed developers in China's unruly housing market. They said it was a good thing these policies were now hitting their mark.
Shares of Chinese property developers plunged last week after reports that the banking regulator had asked trust companies, which are important providers of financing in the sector, to examine risks in their lending to Greentown, a large builder in eastern China.
With property transactions slowing dramatically and prices starting to fall, some investors think it is only a matter of time before Beijing backs down and re-opens credit channels for developers. But the officials said such a volte-face was unlikely.
"There are some developers who are facing funding pressure or have even been cut off. This is something we are happy to see," one said.
Developers were like "dragons and fish jumbled together", he said, referring to a mixture of high and low-quality companies. A consolidation process was "very necessary".
A second official estimated that there were 50,000 property companies in China and that it was important for the market to work out the "survival of the fittest".
Many property developers in China are small and privately owned. These are the most likely to go out of business first, allowing large state-controlled competitors to grab a bigger share of the market.
"Our concern is that we don't want to see anything systemic. If a couple of real estate companies fail because of bad management practices, then they should fail," said the official. "The banks who lent to them should be punished through higher non-performing loans. As long as that doesn't become a big systemic crisis, that's fine."
Chinese housing prices soared from late 2008 to 2010, prompting concerns that a property bubble could trip up the fast-growing economy. The government has addressed these risks over the past year by raising mandatory mortgage downpayments and also ordering banks to lend less to developers.
To plug the lending gap, many property companies turned to trusts, which operate in a grey area in the Chinese financial system, but officials are now also closing off this funding avenue.
An executive with a medium-sized state-owned bank said he saw no evidence of any relaxation in the clampdown. He thought the government wanted to see a process of "the big eating the small" in the property sector.
There have been no big acquisitions of developers in the Chinese property market, but some consolidation has begun to occur as larger companies with more stable funding have expanded, while smaller players have struggled.
China's biggest listed developers increased their nationwide market share from 9 per cent to to 12 per cent last year, a trend that has continued this year, according to Macquarie Securities.