S&P downgrades China property developers

Standard & Poor's on Wednesday downgraded the outlook for Chinese real estate developers to "negative" from "stable" as Beijing restricts lending and limits their access to much-needed credit. The warning, the second by a ratings agency in two months, comes as recent data indicate that the government's efforts to put a cap on the soaring property market seem to be having an impact. "Meaningful price adjustments" in the world's second-largest economy were expected in the second half of 2011 as "policy tightening starts to bite" and sales slow, S&P credit analyst Bei Fu said in a note. "Any meaningful slippage in sales will significantly weaken the developers' cash flow protection measures amid higher leverage and stiff competition." Property developers borrowed heavily ahead of an anticipated downturn in the real estate market and a "protracted negative cycle would therefore intensify the pressure on credit profiles," Fu added. He said if sales volumes fall developers' liquidity was soon evaporate, which would likely lead them to slash prices. In April, Moody's also downgraded China's red-hot property sector to "negative" from "stable" as it warned that rising interest rates and reduced bank lending would dampen demand. It also said Beijing's policy moves to tame soaring inflation and ward off a property bubble -- including bans on second home buying and trial property taxes -- would hurt developers in some cities. China moved to further restrict bank lending on Tuesday by increasing the bank reserve requirement ratio by 50 basis points after official data showed inflation hit a near three-year high in May. Analysts expect the increase to be followed by an interest rate hike in the coming weeks, which would be the fifth since October, as inflation and property prices remain stubbornly high despite persistent efforts to rein in costs. And on Monday the central bank said new loans issued by Chinese banks fell sharply to 551.6 billion yuan ($85.14 billion) in May from 739.6 billion yuan the previous month.