Chinese city bans property developers from borrowing to buy land

Posted on November 17, 2016

Officials in one of China’s hottest property markets have banned developers from borrowing money to buy land, as local governments embrace increasingly drastic measures to curb soaring home prices. 

Prices of new residential properties in Nanjing were up 40 per cent year on year in September, in line with increases in other big cities such as Beijing and Shanghai. 

Over recent months, local governments have tried to cool residential property prices by making it more difficult for people to buy homes. The unprecedented decision by officials in Nanjing to cut off developers’ access to the banking system for land purchases highlights how local governments’ policy focus is shifting to real estate companies and their often murky funding sources. 

Highly leveraged developers, colloquially known as “land kings”, have driven land prices to record levels in many Chinese cities over the past year. Local governments were initially reluctant to rein in the land kings, as land auctions are an important part of their revenue base. 

In September, however, the Chinese government and central bank ordered local governments to cool overheated property markets. 

“Bidders must use their own funds [at auctions],” Nanjing’s land bureau said in a notice. The notice specifically banned developers from bidding with funds from banks, trust companies and insurers. They were also banned from using money raised either on capital markets or through the issuance of wealth management products and “other unregulated funds”. 

Nanjing was due on Thursday to hold its first land auction since late September, when central government directives to cool overheated markets began to take effect. 

Last month China’s securities and banking regulators began to restrict real estate developers’ ability to issue new shares and bonds. 

“All the relevant [national] regulators and government departments have intervened to curb developers’ financing,” said Jonas Short at NSBO, a policy research group. “It’s an example of the concerted action that you get when [Beijing] is convinced something must be done.” 

Corporate bond sales by real estate developers have come to a complete halt this month while their issuance of trust products fell by a quarter in October compared with September. Trust products bundle corporate loans and other assets that are sold on to a variety of investors including bank depositors. 

Thomas Gatley at Gavekal Dragonomics said the immediate impact on many developers would be limited. “Property developers are cash-rich right now from excellent sales this year,” said Mr Gatley. “Only the smaller ones will be affected. More broadly, it is high demand for housing in China’s top cities that drives both land and house price growth.” 

According to the Center for Finance and Policy at the Massachusetts Institute of Technology, roughly 40 per cent of all provincial government debt in China is backed by funds from land sales. But Nanjing’s economy is doing well, allowing its government to forgo some lost revenue from land sales. 

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