Large Chinese real estate firms stand to benefit from recent government policies to encourage the sale of more corporate debt. But smaller companies may not benefit much from these policies.
On December 14, the China Securities Regulatory Commission (CSRC) announced that it had worked closely with the People’s Bank of China to provide tools to support bond financing for private companies in the mainland Chinese capital markets. The first private firms to adopt these financing tools are Shanghai-listed Hengtong Optic-Electric and Shenzhen-listed Guangzhou Zhiguang Electric. The tools deployed by both companies are credit protection contracts.
“The CSRC encourages financial institutions to supply credit protection tools for bonds issued by private companies,” the regulator said.
“Hopes have risen for further policy easing in China after its National Development and Reform Commission released a new policy to allow 'good-quality' companies to raise funds through bond issuance,” Enodo Economics, a London think-tank focused on the Chinese economy, noted in mid-December. “The move points to more easing, and a possible change of tack on the real estate sector, although this is likely more about saving the big, especially state-owned or backed real estate firms.”
On December 12, China’s bond regulator, the National Development and Reform Commission (NDRC) issued a notice to support “high-quality” companies, including property developers, to issue bonds. The criteria for a high-quality company include a domestic issuer rating of AAA and a debt-to-asset ratio no higher than 85%. A property firm can qualify if its assets exceed Rmb150 billion ($21.7 billion) and annual revenues surpass Rmb30 billion.
High-quality companies need only a one-time approval to issue multiple bonds at different times. That approval process will be simplified and speeded up too. And the companies will be allowed to make private bond placements to institutional investors.
Under the new policies, eligible companies can use up to half of the proceeds from these bonds for general working capital. This new funding format can provide eligible developers with more financial flexibility because they can deploy their other financial resources to support development in traditional property projects, is Moody’s take on how the rules will be used.
The NDRC's announcement will create further credit differentiation, as large and financially strong developers benefit from broader access to funding while the weaker ones will continue to face high liquidity and refinancing pressure, the ratings agency said. Until now, the NDRC would only grant a quota for onshore corporate bonds to companies with government links.
The NDRC policy will particularly benefit developers with shanty town redevelopments, as well as social affordable housing and rental housing because the use of bond proceeds will be restricted to these types of projects.
But Moody’s did have some qualifications. “We believe overall funding conditions will remain restrictive to developers in China over the next 6 to 12 months due to slowing sales growth and tightened bank and shadow bank financings to the sector,” it said.
So desperate are the funding needs of some Chinese property firms, that Fantasia Holdings Group, a Chinese developer listed in Hong Kong, recently sold a US dollar offshore bond with a coupon of 15%. And in October, China Evergrande Group, another cash-strapped Chinese property firm, printed US dollar offshore bonds with a 13.75% coupon. The deal caused a massive selloff in US dollar bonds out of the Chinese property sector.
This NDRC policy should be a signal that the Chinese authorities remain on guard against systemic risk. “This should help ease concern over the refinancing risks of some developers,” said Angus To, deputy head of research at ICBC International Research.
Across all sectors, this policy will not have a big impact on bond issuance, as it is highly selective. “For those good quality companies that meet the criteria, they can already raise money in many ways such as bank loans. However, this policy will help boost market sentiment,” he added.
A large number of issuers, especially many privately owned enterprises, cannot meet these criteria, and thus are unable to benefit from this policy, according to Ivan Chung, head of greater China credit research and analysis at Moody’s. Proceeds from the bonds issued by each eligible issuer will depend on funding costs and comparisons with the costs of alternate financing options like bank loans, he said.
“If implemented effectively, this policy is consistent with our view that credit growth would accelerate in 2019 and improve credit allocation efficiency,” Credit Suisse noted in a report.
“A downside risk is that SOEs [state-owned enterprises] and financing vehicles for local governments might dominate the list of qualified issuers instead of private enterprises,” the bank added.
But the issue of more corporate bonds is hardly a reason for foreign investors to increase their investments in this asset class. Judy Kwok-Cheung, fixed income reseearch director at the Bank of Singapore, believes that the major uncertainty for foreign investors before deciding to invest in Chinese onshore corporate bonds is the direction of the yuan.
