China Property:Potential tightening in liquidity leads to higher risks for high gearing Cos

Over RMB800bn decline in new loan indicating potential tightening liquidity.

    On 13 May, PBOC announced the newly added RMB loan in April has droppedsharply from RMB1.37trn to RMB555.6bn, which is less than the marketexpectation of RMB800bn. The amount of social financing also dropped toRMB751nm. The growth of M2 slowed from 13.4% to 12.8%. Recently, Mr.

    Zhang Gaoli, Vice Premier of the State Council said despite the uncertainty stillexisting in the recovery of the global economy, China’s economy is stillresilient. He added that China will allow more bankruptcy cases to lowerleverage but will not carry out large scale of stimulation.

    Higher risks for developers with high gearing and aggressive land acquisitions.

    In 2015 and 2016 so far, the property market has been recovering well and theland market in Tier-1 and core Tier-2 cities have remained strong with manyland banks selling at new record highs. This is attributable to ongoingloosening policy environment as well as liquidity loosening. However, the dropin new loan data signals that the loosening environment might be changing.

    This could affect the growth in new mortgages and hinders the growth in theproperty marker. In our view, a tightened liquidity environment could lead tomore difficulties in getting new loans or loans at lower cost. Thus, resultinghigher risks for developers with high gearing (such as Evergrande), and forthose who have been making aggressive moves in the land market recently(such as Evergrande and Country Garden).