The Chinese Ponzi Continues: Property Developers Buy (Piggy) Banks

"Whatever it takes," appears to have become the new mantra across global financial systems and with Chinese shadow banks under increasing pressure (as cash-for-commodity deal financing dries up and "hedge" losses mount on 'surprise' Yuan weakness), property developers are increasingly desperate for liquidity. The solution, as The FT reports, Chinese property companies are buying stakes in banks and raising fears that the country’s already stretched developers are trying to cosy up to their lenders. 10 Chinese developers, who have been active in recent bank IPOs, have invested an 'unprecedented' $3bn in their potential lifeline lenders.


As The FT reports, Chinese property developers are buying themselves a piggy bank:

Ten Chinese property companies have invested Rmb18.4bn ($3bn) in banks, according to the Financial News, an official newspaper published under the aegis of China’s central bank.




Some of the developers are heavily indebted, sparking questions about the motivation for these deals, and specifically whether the property companies are hoping to use their links to the banks to obtain preferential financing.




There had been some cross-pollination between Chinese developers and banks in the past, with China Resources and Shanghai-based Greenland holding investments in both. But there is no precedent in China for the flurry of recent tie-ups.

Moodys is unimpressed...

Rating agencies have so far taken a cautious view of the deals, noting that property developers are hoping to see benefits but that the investments are still small in scale.


We don’t think they [the developers] expect to get funding from the banks directly, but they will be looking for opportunities for mortgage financing for their clients or financing for their contractors,” said Kaven Tsang of Moody’s.

How they are doing it? Through debt-financing ponzi of course...

Developers have been active as cornerstone investors in some of the recent Chinese bank initial public offerings in Hong Kong...made the deal “to better meet its customers’ demands for financial services”.


In these IPOs, other mainland Chinese companies have often bought up more than half the total available shares, leading some bankers to label them “IPOs without the P” for public.




But a sharp rise in Evergrande’s debt level has fuelled doubts about the wisdom of devoting capital to a bank stake. Evergrande’s gearing ratio – net debt relative to equity – nearly doubled last year to 160 per cent, prompting Barclays analysts to describe it as “a bit out of control”.

So, in summary, as a Chinese property developer, you are dying in the vine from falling asset prices (new home prices are being slashed as 'investors' are desperate for liquidity) and unavilability of cheap lending.. so you borrow - at whatever rate you can (likely mortgage on already mortgaged property and land) - and use that money to finance a bank IPO buying spree - which may (or may not) enable you to pressure the bank to agree better terms for your loans and enable you to live just another day, week, quarter.

The problems is - the regulators are watching closely now as reforms and graft are increasingly not accepted:

“Whether from the perspective of the banks or regulators, as soon as a property company becomes a bank’s shareholder, their business dealings will become related-party transactions, and so will be controlled and supervised more closely,”