China property bond curb calls revive on overheating market

[SHANGHAI] 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 per cent to a record high of 2.8 trillion yuan (S$566 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 Financial Market 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. There was no reply from China Securities Regulatory Commission, another bond regulator, to faxed questions on the possibility of any limits.

"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 government last month cancelled three land sales after a residential plot sold at a record price.

"Some developers' land purchases are crazy," said Xu Hua, 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." Mr Xu said he will "moderately" cut holdings of property bonds.

The yield on AAA rated China Evergrande Group's 2019 bond rose 15 basis points this month to 4.16 per cent, according to exchange data. In contrast, the average yield on top-rated three-year corporate bonds rose only one basis point in the same period, according to Chinabond.

Developers' profitability is worsening, with gross profit margin dropping to 25 per cent 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 Monday.

"We are avoiding highly levered 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 in the 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 Mr Yip.

"Regulators may curb property bond financing," said Huang Weiping, a Shanghai-based bond analyst at Industrial Securities Co.

"Developers with weak competitiveness may face rising credit risks."

BLOOMBERG