Mainland's biggest developers are borrowing record amounts in Hong Kong, taking advantage of lower interest rates to circumvent a lending crackdown at home.
While banks demand at least 5.2 percent in annual interest for three-to-five year money in the mainland, the cost of credit in Hong Kong dollars has fallen to the least since November 2004, according to data compiled by Bloomberg. China Overseas Land & Investment Ltd agreed to an HK$8 billion ($1.03 billion) loan in February that pays 1.45 percent at current market levels, the data show.
"For property developers to keep growing in what is an extremely fragmented and competitive market they have to go offshore" for funds, said Brayan Lai, a credit analyst at Credit Agricole CIB in Hong Kong. "It's one way to circumvent tight onshore credit."
Syndicated borrowing by mainland developers in Hong Kong dollars jumped to HK$37.3 billion this year, the most since Bloomberg began compiling the data in 1999, from HK$3 billion in the same period of 2009. Total lending in the city rose six-fold to HK$63 billion from HK$8.7 billion as mainland banks' share of the market fell to 21 percent from 29 percent, while yuan- denominated lending to developers dropped by 25 percent.
China Resources Land Ltd said on April 30 that it agreed to four loans with banks totaling HK$6.2 billion. Agile Property Holdings Ltd, a developer with projects in 20 cities and districts, borrowed $125 million in January from a Bank of America Corp unit in Hong Kong, Bloomberg data show.
Shimao Pricing
Shimao Property Holdings Ltd, the developer controlled by billionaire Xu Rongmao, is seeking a $400 million loan from Hong Kong units of banks including HSBC Holdings Plc and Standard Chartered Plc, Bloomberg data show. The loan may pay 3.1 percentage points more than the London interbank offered rate, according to Annisa Lee, a credit analyst at Nomura Holdings Inc.
"Companies are going to the syndicated loan market in Hong Kong because liquidity is strong and pricing's competitive," Lee said in a phone interview from the city. For loans, "property companies don't have to pledge their projects as security, so there's more flexibility with regards to the use of proceeds," she said.
Shimao's $350 million of 8 percent bonds due 2016 last traded at a yield of 6.58 percentage points more than Treasuries, according to BNP Paribas SA prices. The company, which has projects in 20 cities across China, said on April 13 that 2009 profit more than quadrupled to 3.51 billion yuan ($514 million).
Government Credibility
Tammy Tam, a spokeswoman for Shimao, didn't respond to requests for comment by phone and e-mail. Doris Chung, a spokeswoman for China Overseas, declined to comment.
Chinese Premier Wen Jiabao's government has staked its "credibility in economic management" on measures to cool the property market, Credit Suisse Group AG said on April 29, after the state raised mortgage rates and down-payment ratios, barred lending for third homes and tightened scrutiny of developers' financing to restrain speculation. Fueled by a $586 billion stimulus package and $1.4 trillion of new loans last year, property prices jumped 11.7 percent in March.
The China Securities Regulatory Commission sent financing requests from 41 real estate companies to the Ministry of Land and Resources for review, according to a government statement on April 24. Companies with property businesses that plan to repay bank loans or boost operating capital must also submit equity financing plans to the ministry, the regulator said.
Yuan Appreciation
Bond sales in Hong Kong may also pay dividends for companies betting on a revaluation of the yuan.
"The consensus is that the yuan will appreciate against the dollar this year," said Credit Agricole's Lai. "If mainland companies borrow in Hong Kong dollars, which are pegged to the US dollar, they would be able to book currency gains and that would help their bottom line."
Policy makers in the mainland have indicated they are waiting for clearer signs of a sustained global rebound before deciding to allow gains in the yuan, which has been pegged at about 6.83 per dollar since July 2008. The Hong Kong dollar has been pegged to its US counterpart since October 1983.
New Loans
Banks in China extended 510.7 billion yuan ($74.81 billion) of new loans in March, less than the median estimate of 21 economists polled by Bloomberg News, after the central bank ordered them to set aside more reserves and urged them to pace loan growth.
China also raised mortgage rates and imposed a sales tax. Labeled "the most draconian measures on the property market in history" by Deutsche Bank AG, the moves mean developers have to pay higher deposits for land purchases while banks must suspend lending to buyers who can't provide tax returns or proof of social security contributions.
"It may be that some of the mainland banks are going to be restricted in the future" so companies "are taking pre-emptive measures to tap into the liquidity in Hong Kong," said Phil Lipton, HSBC's head of syndicated finance for Asia-Pacific debt capital markets.
