China developers jump on possible easing of bond issue rules

[BEIJING] Chinese developers' bonds and stocks rallied on a report that authorities are likely to loosen controls for the nation's real estate companies to issue local-currency notes, part of efforts to prevent a further deterioration in their financing.

The Securities Times said the easing will centre on the interbank bond market, which has seen issuance from developers fall in the past year. While the report didn't specify which rules would be loosened, Chinese junk-rated dollar bonds surged the most in three weeks, and an index of developer shares saw the biggest jump since February. Gains extended following speculation that officials may allow companies to acquire debt-laden property firms without breaching metrics known as the three red lines.

Local news agency Cailian later reported that state-owned enterprises made such a request to regulators. It didn't give more details. The reports came after the US Federal Reserve warned this week that the fragility in China's real estate sector could spread to the US if it deteriorated dramatically. While the move to ease bond rules might calm stressed markets and boost sentiment, analysts cautioned that it would open refinancing channels only for China's higher-quality developers.

"With signs that China's liquidity stress is broadening and even afflicting higher-quality developers, there could be a relaxation of policy regulating access to credit channels, including the onshore bond market," said Wei Liang Chang, macro strategist at DBS Bank.

"An easing of credit access affirms that policy will be suitably responsive, and this should help shore up investor sentiment, particularly for investment-grade credit." Banks and other institutions will resume "blood transfusions" for real estate firms through bond investments, the Securities Times said.

Authorities sent the policy signal at a meeting on Tuesday between some developers and the National Association of Financial Market Institutional Investors, which is under the central bank and shares oversight of corporate bond issuance in the interbank market.

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Developers are looking for ways to raise finance after a selloff in the offshore dollar junk bond market sent yields toward 25 per cent, making costs of rolling over debt prohibitively expensive. Slowing property sales and moves to restrict the use of money from presold apartments are also squeezing cash flows. Chinese junk-rated dollar bonds climbed 2 to 3 cents on the dollar Wednesday, on track for their biggest gain since Oct 18.

Higher-quality issuers such as Country Garden Holdings Co. and CIFI Holdings Group saw some of their bonds jump about 7 cents. Some onshore bonds joined the rally, including those of Yango Group and Shimao Group Holdings. The BI China Real Estate Owners and Developers Valuation Peers index of shares surged 6.3 per cent from close to a four-year low.

While there haven't been any recent public announcements on bond controls, issuance by Chinese real estate companies on the interbank market has slowed from a peak in the third quarter of last year, after the central bank introduced the three red lines - debt limits for the industry. Developers sold US$9.3 billion of bonds in the interbank market last quarter, the least since the end of 2019, according to data compiled by Bloomberg.

"The convening of the symposium means that relevant policies for domestic bond issuance of real estate enterprises will be loosened," the newspaper cited an unidentified market source as saying. "In the near future, there will be real estate enterprises raising financing through bond issuance in the open market."

China Business News first reported on the meeting on Tuesday, saying developers including Country Garden, Poly Developments & Holdings Group, China Merchants Shekou Industrial Zone Holdings, Longfor Group Holdings , Jiayuan Chuangsheng Holding Group and Midea Real Estate Holding plan to register and issue debt financing instruments in the interbank market soon.

A Beijing-based broker engaged in property bond underwriting told the Securities Times that the developers participating in the meeting are quality companies with relatively strong finances. NAFMII didn't immediately reply to an emailed request for comment on the reports.

"It's the first meeting sending an easing message on debt issuance since the three red lines rule rolled out last year," said Yan Yuejin, research director at Shanghai-based E-house China Research and Development Institute. "It has great implications because so far the marginal credit easing has only been seen on bank loans."

China's property industry has been suffering from a nationwide government crackdown on speculation and leverage following years of debt-fueled expansion. A widening crisis at China Evergrande Group, which is saddled with more than US$300 billion in liabilities, is now spreading to other developers, triggering a selloff in their bonds and shares despite official assurances that the problem is controllable.

BLOOMBERG