China considers banning short-term dollar bond sales

HONG KONG: China is slowing approvals for offshore bonds and considering whether to ban short-dated issuance in US dollars, according to people familiar with the matter, moves that would reduce financing options for the developers that have led record sales of such debt.

The National Development & Reform Commission is weighing a ban on the sale of dollar bonds with tenors of less than one year, said the people, who asked not to be named because they’re not authorised to speak publicly.

The regulator is already restricting offshore bond issuance quotas for Chinese companies, people said.

Selling bonds that mature in 364 days has become a popular tactic among Chinese issuers – especially those in real estate – because they didn’t require pre-approval from the NDRC.

The regulator has publicly signaled that it’s wary of the offshore issuance boom, saying in a Wednesday statement that developers are only allowed to use proceeds to refinance existing debt, that some companies are borrowing amounts that are out of proportion with their profits, and that many don’t have foreign-currency revenues to protect themselves against the yuan’s slide.

The new measures threaten to further constrain cash-strapped property developers even as concerns about China’s financial risks ripple across markets.

And it’s not just funding problems that are plaguing the industry: this week, the housing industry escalated a crackdown on property speculation, while the nation’s policy banks tightened approvals on new lending for shanty-town redevelopment projects.

“A ban on issuance only adds to the refinancing risks and defaults amid a weak yuan,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd.

“It’s not good that companies cannot fund themselves in a market.”

The NDRC, which regulates foreign debt sales by companies, didn’t immediately respond to a faxed message seeking comment. Calls went unanswered.

In the regulator’s Wednesday statement, it said that the use of proceeds from builders’ overseas bond sales must be limited to just refinancing, instead of investing in domestic property projects and replenishing working capital.

Foreign debt sales from property developers and local government financing vehicles have increased, the NDRC said.

“Some of the issuers have low profits, which don’t match the amount of foreign debt they are raising,” according to the statement.

“Weaker developers may get hit more due to the restrictions from the regulators, but this is how the bond market should be,” said Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank in Asia.

“Lower quality real estates may go for collateralized loan market with covenants, not covenant light unsecured bond market. I think some of them would need to sell asset for future debt repayments.”—