Exclusive: China Bars Some Developers From Selling Bonds to Curb Risks

Several Chinese property developers were restricted from selling domestic debt as regulators step up efforts to curb excessive borrowing by the sector, Caixin has learned.

The measures are on top of tightened restrictions on offshore bond offerings released by the state planner Friday, highlighting Beijing’s increasing concerns about potential financial risks.

Five property companies were banned from selling any new domestic bonds, while 15 others were warned of debt risks and told to restrict the size of offerings, a senior corporate bond market participant told Caixin.

Some of these companies are now allowed to borrow new debt only to repay old debt to avoid liquidity crises. Some companies were told by regulators that their new bond offering plans won’t be approved, the market participant said.

The National Development and Reform Commission issued a notice Friday requiring that any new offshore bond issues by real estate businesses must be used only to replace medium- and long-term offshore debt maturing in the next year.

The list of the 20 companies banned or restricted from bond offerings was not disclosed, but many market participants speculated that developers that recently sold bonds and bought land aggressively could be among them, such as Evergrande Group, Country Garden and Sunac China Holdings Ltd.

Evergrande Group, the second-largest property developer in China, issued 20 billion yuan ($2.9 billion) of bonds in the first half of 2019, the highest total among real estate companies, according to statistics from the fixed income team at Tianfeng Securities Co.

Chinese developers are facing funding strains after a string of tightening policies since last year in an effort to cool property prices and curb financial risk.

Since March, the central government has repeatedly stressed that “houses are for living, not for speculation.” The banking and insurance regulator recently issued window guidance, asking trust companies not to provide new financing to real estate companies.

The total issuance of domestic bonds by property developers dropped by more than half in May from the previous month. Issuance further declined by 17% month-to-month in June.

Difficulties in accessing funding are forcing many Chinese developers go abroad for financing even though offshore borrowing costs are relatively higher.

During the first four month this year, Chinese real estate companies issued 215 billion yuan of offshore bonds, up 18% from the same period of last year, according to Wind Information Co., a data provider.

More than 15 Chinese property companies have announced plans this month to issue offshore bonds, with a total planned issuance of more than $10 billion. One of the new offshore bonds offers a coupon rate as high as 13%, raising concerns that these companies may have difficulty repaying the debt later.

China’s real estate sector will face more than 100 billion yuan of foreign debt due this year, a person close to the regulators told Caixin. That’s the reason the state planner decided to tighten overseas bond issuance as well, while leaving a gap to allow companies to continue borrowing to repay maturing offshore debt, the person said.