Property rumors drive key index to two-week low

China's A-share market sank to a two-week low on Monday, dragged down by falling property and banking shares amid rumors that banks have stopped extending loans to property-related companies.

The benchmark Shanghai Composite Index retreated by a significant 1.75 percent at the close. Turnover expanded to 107.2 billion yuan ($17.6 billion) from 99.5 billion yuan on the previous trading day.

Messages have been spreading online since Saturday night that Industrial Bank Co Ltd, based in East China's Fujian province, had stopped lending to property companies. More reports followed, saying more banks are tightening loans to steel, cement and other property-related sectors.

Some banks denied the rumors on Monday, but that did not stop the heavy selling in the market.

China's biggest property developer China Vanke Co Ltd dived 6.56 percent in the Shenzhen Stock Exchange while its rival Poly Real Estate Group Co Ltd retreated 8.51 percent in the Shanghai Stock Exchange.

"It is not a surprising drop," said Xin Yu, president of Guangzhou-based Zequan Investment Co Ltd.

"The market is correcting itself after experiencing some growth after the Spring Festival holidays. The rumors about the property market are just a catalyst," he added.

Most industry insiders and investors are pessimistic about the outlook of the industry, expecting some curbing policies to emerge from the two sessions (the annual meetings of the National People's Congress and the Chinese People's Political Consultative Conference) held in Beijing in early March. The stock market reacted to this expectation, Xin said.

"I would stay cautious about the short-term market performance, but I am not so pessimistic about the long term because of the government's determination on reform to sort out China's stock market, which is the major driver for substantial growth," he added.

Industrial Bank said on Monday it had just ordered an end to "mezzanine financing" for developers as well as funding for developers' upstream suppliers such as cement and steel producers. Mezzanine debt is the middle layer of capital that falls between secured senior debt and equity. This type of capital is usually defined as not being secured by assets and is lent strictly based on a company's ability to repay the debt from free cash flow. It is a way for growing businesses to bridge the gap between what conventional banks will lend against assets and the total value of a new project or acquisition.

"Both types of financing should account for only a small part of banks' exposure to the property sector (the majority is usually mortgage financing). We believe the interpretation that Industrial Bank had cut off all funding to developers was significantly distorted," said a report issued by Bank of America Merrill Lynch.

"Historical data show that price reductions in housing always send negative messages to the A-share market. Property sales last March were pretty good and brought pressure for a strong growth rate this March. We believe the market will be hit by pessimistic emotions in the short term," said a report released by Haitong Securities Co Ltd.

However, the report said the chance for a "cliff-drop" is small in the property sector. Although prices might be squeezed in some cities because of destocking by developers, housing prices in Beijing, Shanghai and Guangzhou are expected to rise by about 5 percent in 2014.

Prices of new commercial homes for 70 cities surveyed by the National Bureau of Statistics increased by 0.4 percent month-on-month in January, the same as in December. In year-on-year terms, the average price growth of the 70 cities dropped to 9.5 percent in January from 9.7 percent in December.

Meanwhile, eye-catching headlines are circulating that home prices in Hangzhou, the capital city of Zhejiang province, are falling, triggering predictions of a possible crash in the property market.