James Macdonald, head of research for China at Savills, says: “China financial regulators have already started tackling the shadow banking sector, the interbank lending markets, encouraging banks to realise and address bad loans either writing them off or through debt for equity arrangements.”

For domestic investment there has been an increase in the cost of debt both from commercial banks, now 7-8% (as well as a reduction of LTVs in certain cases from 60% to 50%), as well as a rise in the cost of mezzanine financing to 10-15%.

In the domestic housing market, down payments of 30-40% are already required for most first homes and 70-80% for second homes. Mortgage rates for first time buyers in 35 leading cities, according to Rong360, increased from 4.44% in January 2017 to 5.60% in May 2018.

Recent actions, such as the government support for conglomerate HNA Group, which has $93bn of debt, through its deleveraging process demonstrate Beijing’s commitment to financial stability.

Cross-border investors may find opportunities in the non-performing loans market, which has been growing steadily for the past five years (see chart above) and an increased need for equity from indebted Chinese developers.

Outstanding bad loans from commercial banks amounted to RMB1.7trn ($270.6bn) at the end of 2017 or 1.7% of loans, according to the China Banking Regulatory Commission, having grown more than threefold over the past five years. This number however is believed by many to be greatly understated with Fitch recently estimating that the real ratio could be as high as 20% implying RMB19 trillion of NPLs.

A number of international NPL investors, including KKR, Oaktree, Lone Star Capital and Goldman Sachs have been active in China, buying NPLs from the four state-backed asset management companies set up to manage the bad loans.

However, Macdonald says: “If international NPL investors can earn 15%+ returns in markets like the US or Europe, they will demand higher returns in developing markets such as China. However, the asking prices for many China NPL portfolios which have come to the market in recent months suggest investors will be able to make only low double digit returns at best.”

Opportunities may arise in the direct real estate market. In a recent interview with Bloomberg, Blackstone Group Asia Pacific chairman Chris Heady said the private equity firm had been selling assets in China, but added “that probably is going to change,” citing signs of tightening credit.

Blackstone has also been active in the NPL sector, buying a $200m portfolio in January.

Further reading:
Savills China Research and Publications
Asia Times – China’s non-performing real estate loans soar, says report