China state-owned developers borrow cheaply as peers shut out

A divide in funding access is widening among Chinese developers, as most struggle to raise cash in the domestic bond market amid a deepening sector crisis while mostly state-backed builders manage to borrow at the lowest cost in 12 years.

The average coupon on builders' yuan bonds issued last month fell to 3.32 per cent, the lowest since September 2010 when 2 notes were sold, according to data compiled by Bloomberg.

Most of the developers that enjoyed such low funding costs in July were state-owned firms. They've been dominating the property industry's recent issuance and are benefiting from lower borrowing costs thanks to "supportive regulatory policies", according to Li Han, a fixed income analyst at Citic Securities. Fewer private-sector and generally higher-rated, builders selling bonds have driven average onshore issuance costs lower, he said.

Conversely, private-sector developers still face financing challenges. They've been dealing with liquidity pressure for more than a year, as regulatory steps to curb further debt growth were followed by difficulties in refinancing borrowings and an ongoing sales plunge. Recently, mortgage-payment boycotts by buyers of unfinished residences turned national and China's top leadership didn't announce new stimulus. The government is considering a plan to seize undeveloped land and use it to help finance the completion of stalled housing projects, Bloomberg News reported.

Given most builders' struggles issuing new bonds domestically or overseas, July's average onshore coupon was "more likely a reflection of the low funding cost for high-quality names rather than something the majority of the companies in the industry can benefit from", said S&P Global Ratings director Edward Chan.

Last month's deals included a combined 4 billion yuan (S$810 million) of bonds with yields from 2.89 per cent to 3.28 per cent from state-controlled Poly Developments and Holdings Group and a 3 billion yuan 3 per cent note from publicly held China Vanke, the country's second-largest builder by contracted sales.

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State-owned companies overall have been selling bonds in the domestic market at record low yields this year, as investors flee to the perceived safety of government-backed borrowers and the country's sovereign debt has avoided 2022's global rout. Yields across all Chinese onshore corporate debt have been falling steadily from a March peak, helping push spreads versus government bonds to their narrowest levels in years. BLOOMBERG