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China considers banning short-term US 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 (NDRC) is weighing a ban on the sale of US dollar bonds with tenors of less than one year, said the sources, who asked not to be named because they are not authorised to speak publicly. The regulator is already restricting offshore bond issuance quotas for Chinese companies, the sources said. Selling bonds that mature in 364 days has become a popular tactic among Chinese issuers - especially those in real estate - because they did not require pre-approval from the NDRC.

The regulator has publicly signalled that it is 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 do not have foreign currency revenues to protect themselves against the yuan's slide.

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The new measures threaten to further constrain cash-strapped property developers even as concerns about China's financial risks ripple across markets. And it is 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, did not 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 do not match the amount of foreign debt they are raising," said 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 collateralised loan market with covenants, not covenant light unsecured bond market. I think some of them would need to sell asset for future debt repayments."

"The government is trying to remind developers that the deleveraging campaign is still a focus. While the authorities have been ensuring that funding channels remain open, this is to ensure there is no disruption to refinancing," said Sandra Chow, senior analyst at CreditSights in Singapore. "It is not meant to allow developers to pursue aggressive business expansion."

Real estate stocks and bonds were under pressure on Thursday. Most Chinese property US dollar bonds fell, with China Evergrande Group and Fantasia Holdings Group Co leading the losses, according to ICE BofAML index.

In the past two years, Chinese developers have sold about US$10 billion of US dollar bonds that mature in less than a year, Bloomberg-compiled data show. An index of shares in 22 Chinese developers has tumbled 12 per cent since Monday as investors have grown increasingly nervous about the outlook for the sector. The gauge fell for a fourth straight day on Thursday, with Longfor Properties Co and Shimao Property Holdings Ltd the biggest decliners, sinking 5.9 per cent and 5.5 per cent respectively as at 2.31 pm local time.

The NDRC is trying to control offshore issuance by weaker and less competitive developers who may be over-relying on offshore capital markets, said Christopher Yip, an analyst at S&P Global Ratings in Hong Kong.

Chinese builders, faced with bond payments of US$77.4 billion in the domestic and overseas markets till 2019, have been reeling from tightened liquidity at home induced by a clampdown on shadow financing. BLOOMBERG