PERE China: shadow banking bringing dislocation, not crisis

Panelists at the PERE Forum China in Shanghai allayed fears of an upcoming credit crisis in China’s property market, saying that the constrained liquidity is not enough to crash the market but enough to present distressed opportunities for investors.

China’s so-called “shadow banking” and trust loan system has reached RMB11.7 trillion (€1.4 trillion; $1.9 trillion) nationwide, according to Mark Gabbay, Asia-Pacific co-head and chief investment officer at LaSalle Investment Management. Approximately 10 percent of those short-term, 2- to 3-year loans are believed to be in the real estate sector, he added. Though that is down from the 17.3 percent peak in 2011, real estate remains central to the system.

Multiple panels acknowledged the fear of a property bubble in China, amid hints in mainstream media of another subprime crisis mirroring the US in 2008. Panelists did not deny that China was experiencing some distress or dislocation thanks to the constrained liquidity, such as cash-starved developers selling individual projects, but no-one believed China was at risk of such a crisis.

“In order to have a non-performing loan crisis, the loans need to be called in and forced into default,” Gabbay explained. “To date, even though there have been some defaults, the vast majority of the ‘shadow banking’ loans are being extended.” Only when lenders start forcing real estate projects or developers to sell their assets on the market out of default could there be a crisis, he said, and others also agreed that was not likely.

Metropolitan Rea Estate Asia managing director John So added that dislocation and stress in the NPL system presents an exciting opportunity for his firm. However, he did not predict a crash because the whole country has been preparing for the downturn for some time, and is expected to handle it with extensions and deals.
Xiaoliang Xu, president of Fosun Property Holdings, also insisted that demand in sectors such as tourism, an aging population and healthcare will help carry China through the volatility. “This is part of China’s natural change and development,” he said. “The country has to go through this evolution, and real estate is the hinge.”

Henk Porte, senior portfolio manager for Syntrus Achmea Real Estate & Finance, posited that the term “shadow banking” is something of a misnomer, as the same patterns are found all over the world. In fact, he said shadow banking might even be a bigger force in the UK or the Netherlands. The only difference is that in China, it is not regulated as tightly.