Chinese US Home Loan Set for Trouble 国开行拟向美国地产商贷款料遇政治障碍

By newsdoug on June 27, 2012

China finances US homes There’s an interesting report out there today about another Sino-US deal that’s bound to attract controversy for political reasons, this one involving an American real estate developer looking for Chinese money to build homes in the San Francisco area. I’m probably sounding a bit too pessimistic by repeatedly predicting these kinds of deals are destined to fail due to pressure from US politicians, which is what has happened several times over the last 2 years for deals in the sensitive telecoms infrastructure space.

Perhaps China is hoping that if its companies sign enough of these deals, US politicians will eventually tire of fighting them and finally realize that China isn’t interested in taking control of the US but rather is just looking for good investment options for its money. But that may not happen anytime soon, and certainly not in a presidential election year.

Let’s look at this actual deal, which has a US home builder named Lennar Corp (NYSE: LEN) reportedly in talks for a $1 billion housing development loan from China Development Bank, a state-controlled lender that is trying to become more commercial-oriented. (English article) According to the report, Lennar would use the funds as part of a $13 billion plan to redevelop 2 former Navy sites in the San Francisco area into residential areas.

The big hitch – and the condition that will undoubtedly worry politicians – is that Lennar must give at least $1.5 billion in contracts to China Railway Construction Corp (HKEx: 1186) as part of the deal.

First off, if China Development Bank wants to convince the world that it’s not a policy lending arm of Beijing, then it shouldn’t attach this kind of condition to the loan, which a commercial lender would never do. But if the loan does indeed get signed, I can predict that it will almost definitely attract the attention of US politicians who will voice concerns that China Railway could use this opportunity for building roads and other infrastructure to secretly install equipment and devices that could be used for spying.

Infrastructure building is always a sensitive subject, even if it’s something as simple as roads, and I’m a bit surprised that China Development Bank would make such a request, even if its aim is simply to give China Railway some international experience.

High-tech spying concerns have killed similar bids to build telecoms infrastructure in the US by export giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063); and I predicted last month that more politically motivated concerns could also kill a pending deal for Chinese real estate developer Wanda Group to buy AMC Entertainment, the second largest US movie theater operator. (previous post).

If Beijing is smart and really wants Chinese companies to invest in the US, it should try to avoid these kinds of sensitive deals and instead focus on less controversial areas like traditional finance, other services and perhaps some manufacturing. Otherwise, it will find its deals repeatedly running into political obstacles, which is what’s likely to happen to this real estate deal if and when Lennar finally reaches a loan agreement with China Development Bank.

Bottom line: A $1 billion Chinese loan to a US home builder is likely to run into political problems due to a condition that will raise security concerns.

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