China’s banking regulator has told lenders in Shanghai to increase their scrutiny of loans for mergers and acquisitions to ensure the funds aren’t used to buy land, according to people familiar with the matter.
A significant portion of M&A loans in Shanghai have been used for deals involving land as the main underlying asset, the China Banking Regulatory Commission’s Shanghai branch said in a notice issued in recent days, according to the people, who asked not to be identified as they’re not authorized to speak publicly. The regulator requested banks to strictly comply with current policies on M&A loans and other real estate lending policies.
The directive marks the latest move in China’s crackdown on risks in the $38 trillion banking industry and its campaign to reduce the flow of money into riskier areas such as real estate. Authorities stepped up restrictions on lenders’ entrusted loans business last month, plugging a loophole in shadow financing to the property sector, after last year tightening the sources of home loans.
“It’s like a continuous bomb disposal in China’s deleveraging of the property sector,” said Van Liu, a Shenzhen-based Guotai Junan International Co. property analyst. “China has been plugging real estate financing loopholes since the end of 2016 in wealth-management funds, entrusted loans and trusts, and this is another step.”
CBRC’s Shanghai branch reiterated that banks aren’t allowed to provide M&A loans for the purchase of companies whose only assets are land holdings, the people said. In addition, banks are prohibited from providing loans in any form to land projects where permission to start construction hasn’t been received, or where land-acquisition fees haven’t been fully paid, the people added.
China’s developers have been on a debt-fueled acquisition binge, racing to amass land banks in an attempt to acquire market share amid faster consolidation in the industry. Nationwide, builders spent a record 646 billion yuan ($103 billion) last year swallowing competitors or their assets, according to data compiled by Bloomberg, as land prices surged.
In the directive, the regulator also urged banks to boost merger and acquisition loans to strategically-important sectors, as well as for overseas acquisitions involving key technology and intellectual property, according to the people.
Leverage for Land-buying
M&A loans have been increasingly used since 2016, especially by smaller firms, to fund purchases as regulators started to cool the land market by asking builders to use their own funds for such acquisitions, Guotai Junan’s Liu said.
The land expansion has come with a pile of mounting debt, as leverage for developers rose to an all-time high in the first half of 2017. China Evergrande Group and Sunac China Holdings Ltd. have the highest net debt-to-equity ratios, a measure of leverage, among developers, prompting caution among ratings companies and some analysts.
Earlier this week, regulators required Hengfeng Bank Co., a regional Chinese lender, to temporarily halt new real estate lending.
— With assistance by Jun Luo, Heng Xie, Steven Yang, and Emma Dong
This story, written for Bloomberg News, first appeared on Feb 1.