¥230 Billion in Developer Market Cap Wiped Out in 2 Weeks

On June 25, there were reports than China Development Bank cut off lending for new shantytown renovations. Reports also said the bank would stop lending for cash payments, and would only finance housing-for-housing swaps. The shantytown renovation project can be cynically described as a broken windows policy whereby China bulldozes existing housing to clear out its excess housing inventory. It's also the case that substandard housing (no running water, no toilets) could stand to be demolished. To some extent, the policy is a social welfare program. There's also a clear incentive for local governments and developers to generate GDP and profit by knocking down as many buildings as possible though.

As for the change itself, there is some dispute as discussed below. However, what isn't in dispute is the change in developer market value. The 139 listed A-share developers have seen their collective market cap fall 230 billion yuan (10 percent) in the past two weeks.

Caixin: Policy Lender Denies Reports It Stopped Shantytown Support
China Development Bank (CDB) says that while some local governments have gotten more cautious about taking on debt to support shantytown redevelopment projects, the policy lender has not halted loans to support them, contradicting multiple media reports.

“China Development Bank has been strictly implementing the country’s policies on shantytown renovations,” the bank said in a statement to Caixin on Monday.
The CDB's explanation for a drop in lending isn't good new though:
Some localities have halted investments in shantytown renovations because of central government limits on local debt, sources from the CDB told Caixin. But the bank has not — as media reports have suggested — halted pledged supplementary lending (PSL) to support shantytown redevelopments, the sources told Caixin.
Whether CDB pulled the plug or local governments pulled the plug, the explanation is the same: debt limits.
A day after the Caixin story hit, the SCMP reported: Is China cutting the financial lifeline for its massive city revival schemes?
But Li Yimin, an analyst with Shenwan Hongyuan Securities in Shanghai, wrote in a note that the statement signalled that CDB would be much more discreet and cautious in lending for the schemes.

The urban rehabilitation drive started out as a programme to move poor residents into new homes with indoor toilets and kitchens. Over the years it evolved into a scheme that compensated families in shanty areas for the demolition of their homes, with the families using the money to buy a flat on the open market.
Real estate still drives China's economy:
The Chinese government said it planned to resettle 100 million people by 2020 and has developed 18 million flats in the past three years. It plans to built up another 15 million units by 2020, including 5.8 million units to be completed by the end of this year.

This investment is a key growth driver in China and a slowdown in funding into the programme risks adding to the pressures the country could feel from a trade war with the United States.
Cheap credit finances the growth:
It was able to charge a particularly low rate of interest because it was getting special funding from the central bank via a scheme launched in 2014 called “pledged supplementary lending”, a way of printing money to bankroll urban development plans.

CDB said it had extended a total of 3.4 trillion yuan (US$513 billion) in loans to fund shanty town development as the end of last year, helping to relocate 20 million households, or about as many as there are in Britain.
This project mainly benefited smaller cities, which is why the mood was dark when it was announced, as covered in Third and Fourth-Tier Cities Doomed As PSL Goes Away, Deleveraging Will Not End. The quote that summed up that piece:
"There is no support for property prices in third- and fourth-tier cities."

Third- and fourth-tier cities have led the real estate market in the past year-plus. Developers shifted their focus into these cities because there was government supported growth. Without this support and amid deleveraging efforts, the outlook for marginal developers is grim. All developers suffered from the news though. By one count, 230 billion yuan in market capitalization was wiped off 139 listed developers in the two weeks following the news.

iFeng: 棚改贷款收紧信号下 139家上市房企市值缩水2300亿
In the capital market, real estate stocks also fell sharply across the board. According to Choice data, 110 of the 139 real estate stocks (the SFC industry classification) of the Shanghai and Shenzhen stock markets as of July 6 have shown a downward trend since June 25.
The shift in policy has forced developers into higher cost financing:
It is worth noting that behind the PSL tightening, real estate companies have generally reduced their refinancing this year. Many real estate companies have chosen to issue bond financing. In the first quarter of this year, the debt ratio of over half of real estate listed companies is on the rise, and the pressure on interest-bearing liabilities is also increasing.
Equities tumbled from June 25 to July 6:
As soon as the news came out, property stocks fell. According to Choice data, as of July 6, 110 of the 139 real estate stocks in Shanghai and Shenzhen stocks have shown a downward trend since June 25. Among them, Nandu Property, Poly Real Estate and OCT A fell by more than 20%.

...In this context, on June 27, the CDB News Office issued a statement saying that the China Development Bank has never authorized any person to speak on behalf of the development bank, and the statement does not represent the National Development Bank. At the same time, many listed companies have also begun to respond to the shed reform policy.

However, these have failed to restore the stock price of real estate stocks. Choice data shows that as of June 25, the total market value of 139 real estate stocks reached 2,278.29 billion yuan, and by July 8, the total market capitalization of 139 real estate stocks was only 2,048.46 billion yuan, which means that in just two short During the week, the total market value of real estate stocks evaporated by 229.83 billion yuan.
Developers are in the process of raising 165 billion yuan in debt markets and debt ratios are rising:
There are still many real estate companies whose bond issuance plans are still in progress. Choice data shows that since January 2018, there are still 39 real estate companies' bond issuance plans still in progress, involving a total of 165.18 billion yuan.

...Compared with the end of 2017, the liabilities of real estate enterprises also showed an upward trend in the first quarter of this year. The debt ratio of 72 companies at the end of the first quarter increased from the beginning of the year, accounting for 51.7%; the interest-bearing debt ratio of 77 companies was higher than that at the beginning of the year. It has risen, accounting for 55%.
Over the past two weeks, the market gave a clear warning: a modest change in credit growth is worth 10 percent of developer market capitalization. Even if the wider economy avoids a major hit from a slowing real estate market, developers' listed shares will not.

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