PERE China: Credit crunch no long-term threat

Although China’s ‘credit crunch’ has sent markets reeling the world over, it is one of the only ways to solve China’s fluctuating liquidity problem, said speakers at the PERE Forum: China 2013 in Beijing today. In fact, some expected it to make the real estate market in the country more attractive to investors in the long run.

China’s dearth of institutional-grade real estate is no secret, delegates heard at the one-day event, and many Chinese banks have attempted to quicken its sophistication with financial engineering. Charles Lam, real estate managing director at Hong Kong-based private equity firm Baring Private Equity Asia, drew a distinction between “physical core” and “financial core” in China, saying most of China’s core assets are actually the latter – they do not have the revenue of a core asset, but the banks rate them and lend to them as if they do, he said.

“Real estate has always been the fastest growing sector in the country, so a lot of financial institutions have come out with something like shadow banking for short-term investment,” James Chou, head of China at Hong Kong-based private equity real estate firm Arch Capital management, said on the conference’s opening panel on domestic economy policy. Banks became accustomed to using off-balance sheet money to finance real estate developers through trust companies, according to James Pan, chief executive of fund manager Everbright Ashmore. Unfortunately, many such investments incurred refinancing problems after a few years, Lam added.

The policies referred to as a ‘credit crunch’ are an attempt to curb this form of shadow banking, and reflect a change in attitude of the country’s new government, said global property services firm CBRE China’s head of research and executive director Frank Chen. He said the state is trying to adjust to slower growth in the long term.

“[The new government] does not want to develop the mentality that the [People’s Bank of China] and other banks will step in with loans whenever there’s trouble,” Chen said in his opening presentation. But he said that the impact on the property sector should only be short-term. “Hopefully banks will learn from this credit crunch, and behave more responsibly,” he said. 

Changing policies have traditionally made Chinese real estate investments high-risk, but Baring’s Lam pointed out that the government has given every indication it wants investment to continue. “Of course in the short term [these regulations] hurt your productivity, but every time it cleans up some of the messes” in China’s system, he said on the panel.

“The credit crunch will be hard in the short term, but in the long term it will solve the market’s problems – we simply need the right procedures,” said Tim Wang, managing director at the Blackstone Group. He outlined how the tightening of short-term financing would actually allow investors with capital – such as foreign investment houses like his employer – to attain a more competitive position in the market.