(Yicai Global) Nov. 16 -- A property developer under China Merchants Group has terminated a CNY7 billion (USD1.1 billion) deal to take a stake in Shenzhen Nanyou Holdings, the main holder of land in Qianhai Bay Free Trade Port Zone in the southern Chinese city of Shenzhen.

China Merchants Shekou Industrial Zone Holdings, which had agreed at the end of May to buy 24 percent of Nanyou, made the announcement yesterday, citing changes to the macro-environment and other factors.

The Shenzhen-based developer intended to finance half of the acquisition in cash and the rest through new shares and convertible bonds. It also planned to introduce Ping An Assets Management and Ping An Life Insurance as strategic investors, and privately place shares in Ping An’s associated companies to raise matching funds.

Nanyou indirectly holds 50 percent of Shenzhen Qianhai Shekou Free-Trade Investment and Development that owns the usage rights to 806,200 square meters of land in the Qianhai-Shekou Free-Trade Zone, which is Nanyou’s major asset. This area has been a hotspot for real estate developers in recent years.

China Merchants Shekou Industrial had said that after the completion of the transaction, Nanyou would become a wholly owned subsidiary, which would boost the value of resources in the Qianhai FTZ owned by the company.

While awaiting regulatory approval, the turning point came on Sept. 14 when China Merchants Shekou Industrial said it had decided to make the purchase with funds raised only from the sale of new shares and bonds. The firm said the change of plan was the result of regulators wanting to know if Ping An Asset Management and Ping An Life Insurance complied with strategic investor rules.

Insurance-backed funds have favored China’s high-yielding property sector, but in recent years, tighter supervision of financial sector risks has led to insurance-backed investment in real estate being more heavily regulated.

On Nov. 13, the China Banking and Insurance Regulatory Commission issued a document requiring target companies involved in financial and equity investment of insurance funds to not “directly engage in the development and construction of properties, including developing or selling commercial houses for residency.”

At the end of August, regulators also acted to strictly control the real estate sector’s overall financing, and property developers universally faced pressure to lower their debts. China Merchants Shekou Industrial’s plan to raise funds by issuing shares and bonds became harder after Ping An’s exit, resulting in the deal’s termination.

Editor: Peter Thomas