Fresh curbs loom on de­vel­op­ers’ bonds

China Daily (USA) - - BUSINESS -

Two years ago, China lifted a ban on prop­erty de­vel­op­ers’ sell­ing bonds in­side the coun­try, help­ing stim­u­late the econ­omy and re­duce swelling for­eign debt. Now there are calls for some kind of lim­its to be re­stored.

S&P Global Ratings said surg­ing lever­age may prompt au­thor­i­ties to curb on­shore note sales by builders to cool an over­heat­ing real es­tate mar­ket, while CITIC Se­cu­ri­ties Co said the govern­ment should strengthen con­trols on such fi­nanc­ing. To­tal debt for 119 listed de­vel­op­ers rose 30 per­cent to a record high of 2.8 tril­lion yuan ($420 bil­lion) at the end of June from a year ear­lier, Bloomberg-com­piled data show. Their sales of on­shore bonds surged to 458 bil­lion yuan this year, ex­ceed­ing the 443 bil­lion yuan for all of 2015.

“Chi­nese de­vel­op­ers’ debt has grown in par­al­lel with their ag­gres­sive land ac­qui­si­tions,” said Christo­pher Yip, an an­a­lyst at S&P Global Ratings in Hong Kong. The govern­ment “may curb de­vel­op­ers’ debt fi­nanc­ing if they con­tinue to take ad­van­tage of easy ac­cess to cheap credit for buy­ing land, push­ing up home prices and mak­ing the mar­ket more over­heated.”

China’s lead­ers pledged to curb as­set bub­bles after a meet­ing led by Pres­i­dent Xi Jin­ping in July. Ma­jor cities have un­veiled curbs on spec­u­la­tive home buy­ing, rais­ing risks that de­vel­op­ers will be left overex­tended if de­mand wanes for their projects and debt. Builders can’t sell on­shore bonds un­til they get ap­proval from reg­u­la­tors.

The Na­tional As­so­ci­a­tion of Fi­nan­cialMar­ket In­sti­tu­tional In­vestors, which reg­u­lates in­ter­bank is­suance, said on Sept 2 it has strength­ened mon­i­tor­ing of how de­vel­op­ers use debt pro­ceeds.

A NAFMII press of­fi­cial de­clined to im­me­di­ately com­ment on the pos­si­bil­ity of any curbs. “Reg­u­la­tors should con­trol de­vel­op­ers’ bond fi­nanc­ing to help cool the over­heat­ing mar­ket,” said Ming Ming, head of fixed in­come re­search in Bei­jing at CITIC Se­cu­ri­ties.

The Shang­hai lo­cal govern­ment last month can­celed three land sales after a res­i­den­tial plot sold at a record price.

“Some de­vel­op­ers’ land pur­chases are crazy,” said XuHua, a Shang­hai-based bond fund man­ager at Co­light As­set Man­age­ment, which over­sees more than 40 bil­lion yuan of as­sets. “Be­cause many de­vel­op­ers rely on bor­row­ing the new debt to re­pay the old, risks will pile up if they can’t roll over debt.”

De­vel­op­ers’ prof­itabil­ity is wors­en­ing, with gross profit mar­gin drop­ping to 25 per­cent in the first half of this year, the low­est since at least 2008, ac­cord­ing to Bloomberg data. Even so, West­ern As­set Man­age­ment Co sees the in­dus­try’s credit risks as “man­age­able”.

Credit met­rics for China’s prop­erty sec­tor “are not fall­ing off the cliff”, Des­mond Soon, co-head of in­vest­ment man­age­ment for Asia ex-Ja­pan at the fund, said in a brief­ing in Hong Kong. “We are avoid­ing highly lever­aged de­vel­op­ers and are be­com­ing more se­lec­tive on builder bonds.”

Any crack­down on de­vel­oper’s fundrais­ing is likely to be han­dled with care as the sec­tor grew faster than the over­all econ­omy inthe sec­ond quar­ter.

Fall­ing bor­row­ing costs on­shore and lower for­eign debt have helped im­prove the ra­tio of earn­ings-to-in­ter­est ex­pense for many Chi­nese de­vel­op­ers, said S&P’s Yip.

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