Caixin
Jun 20, 2019 04:49 AM
ECONOMY

Tight Credit Drives Chinese Developers Abroad for Financing

Chinese developers face funding strains after a string of tightening policies since last year. Photo: VCG
Chinese developers face funding strains after a string of tightening policies since last year. Photo: VCG

Government-driven tight credit-market conditions in China are prompting property developers to sell U.S. dollar bonds overseas at double the cost of borrowing domestically.

A total of 18 Chinese real estate companies issued bonds so far in June, of which 11 sold or planned to sell bonds overseas with a total estimated issuance of more $3 billion. That compares with only two offshore bond offerings by domestic developers in May, according to a report by property consultancy China Real Estate Information Corp. (CRIC).

Chinese developers, especially smaller and financially weaker companies, face funding strains after a string of tightening policies since last year in an effort to cool property prices and curb financial risk. Last month the China Banking and Insurance Regulatory Commission (CBIRC) banned direct financing to developers with incomplete certificates or real estate projects with capital not fully in place. The regulator also banned indirect financing through equity investments and bond subscriptions to those developers.

Policies may tighten further as CBIRC Chairman Guo Shuqing at a financial forum last week warned against speculation in the property sector.

Borrowing abroad is doubling the financing costs of some developers. Jiangsu Zhongnan Construction Group Co. last week issued $350 million of offshore bonds at a 10.875% coupon rate. China South City Holdings sold $60 million of U.S. dollar senior notes at a rate of 11.875%. Zhenro Group issued $200 million of U.S. dollar perpetual bonds at a rate of 10.25%. By contrast, onshore bond borrowing costs were less than 5% in March, according a report by Centaline Property Agency.

Offshore financing costs for Chinese developers averaged at 8.13% during the first five months of 2019, a jump from 7.05% in 2018, according to the CRIC report. The costs climbed to 9.80% in May.

“For developers, how to get funds to maintain their growth is their top priority,” CRIC said in the report. “In this context, they have to pay a higher cost to seek financing overseas.”

The rising costs resulted from increases in U.S. interest rates, and higher related fees for issuance of offshore bonds make costs higher than domestic bond financing, said Zhang Hongwei, chief analyst with Tospur Real Estate Consulting.

The CRIC report projected that the proportion of foreign debt issuance by developers and financing costs would continue rising. How to seek further breakthroughs in financing channels and effectively reduce leverage will be the main challenges Chinese developers face, the report said.

Contact editor Han Wei (weihan@caixin.com)

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