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China's most indebted developer Sunac faces lender scrutiny

[BEIJING] China's most indebted developer is the latest firm to feel the heat amid a drive by regulators to rein in risks in the financial system.

China Huarong Asset Management Co, a state-owned entity whose businesses include lending, asked units to temporarily suspend new project financing to Sunac China Holdings Ltd, according to an internal email seen by Bloomberg. While Huarong says it's not acting on instructions from regulators, the email noted authorities are paying more attention to Sunac's high debt load and aggressive acquisition strategy.

Sunac shares closed 2.8 per cent lower in Hong Kong on Wednesday, after earlier tumbling as much as 6.4 per cent. The shares have advanced 467 per cent this year to rank among the world's top performing stocks. Sunac's US$600 million bonds due in 2022 were down 0.4 cents on the dollar to 100 cents, the biggest drop since they were sold last month.

Sunac denied Bloomberg's report, saying in a statement that cooperation between the developer and Huarong remains normal.

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Chairman Sun Hongbin has overseen a buying spree that has elevated the company's net gearing to almost 400 percent, according to analyst estimates. Some of the acquisitions, such as an investment in a struggling Internet company, have raised concerns at ratings companies. The pressure on Sunac comes as China has intensified a crackdown on the nation's most prolific dealmakers ahead of its twice-a-decade Party Congress.

Effective Sept 18, Huarong's risk department ordered a suspension of any new project loans to Sunac that haven't been signed, according to the internal email. The email also called for heightened risk monitoring and attention to existing loans and said any financing for projects deemed necessary, with controllable risk, will need approval from Huarong's headquarters.

Huarong said in a statement to Bloomberg that it continues to cooperate with Sunac on the condition that risks remain manageable, and that it hasn't received any regulatory request or notice regarding Sunac. Huarong didn't dispute the authenticity of the email seen by Bloomberg.

Sunac said in its statement that its work with Huarong has been continuing normally and wasn't halted. "The attention paid to Sunac was China Huarong's normal client management behavior. China Huarong didn't cease business cooperation with Sunac, and under the precondition of risks being controllable, China Huarong will continue to maintain its cooperation with Sunac," according to the statement.

Huarong, with 1.6 trillion yuan of assets, was created with approval from the State Council as a non-banking financial institution. The company's units include banking, trust, securities, financial leasing, futures, consumer finance, property and international operations. The extent of its lending relationship with Sunac wasn't immediately apparent. Sunac's annual report for 2016 and semi-annual results released last month did not mention any relationship with Huarong.

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