China's shadow banking crackdown slows home market

A tightening lending environment may cause property sales to plummet.

China’s widespread crackdown on shadow banking activity is set to significantly slow down the housing market, according to Moody’s Investors Research, as developers will have less amount of credit to finance their projects amidst an overall tightening lending environment.

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“We expect sales on a 12-month rolling basis, to continue slowing and to decline slightly from 2017’s high base through June 2019. The decline will be driven by lower sales volume because of tighter bank financing for homebuyers and demand satisfied in 2017,” said Moody’s senior credit officer Kaven Tsang.

Higher costs of funding loom in the near future as the crackdown by Beijing on the exponential growth of wealth management products may prompt banks to be more selective of the real estate projects they choose to finance, with a bias for financially healthy developers with good credit quality.

Similarly, banks in China have also become more selective in extending mortgage loans to homebuyers amidst a bias for first-time buyers. The time it takes to process and disburse a loan has also been extended compared with last year.

“This combination reduces buyers' financial capacity to buy a home and slows the sales process. As a result, nationwide property sales will slow and developers’ liquidity will weaken, especially those with small operations and high refinancing needs in the next 6-12 months,” Tsang added.

Smaller developers that rely on shadow banking financing are correspondingly more vulnerable to the credit tightening and face higher refinancing risks than their peers as the tenor of shadow banking financing is typically in between 12-18 months.

Photo from Donaldytong - Own work, CC BY-SA 3.0