Underwriters said hardly any new developer bond applications were accepted in August in the stock exchange markets, following a flood of onshore deals totalling 1.1 trillion yuan ($165 billion) in the past 16 months, according to Wind, a Chinese financial data provider.
The stock exchange market has become the predominant venue for developers to raise funds onshore. By contrast, the interbank bond market saw total issuance from developers of just around 200 billion yuan in the same period.
Ma Jun, the central bank’s chief economist, told the China Business News in an interview that China should take steps to curb the flow of capital into the property market and state-owned companies to help slow the rise of debt levels in the economy, reported on Monday.
“We should take a lot of measures to curb excessive bubbles in the real estate sector, curb the flow of excessive financial resources into the real estate sector,” Ma said.
The pause comes after the China Securities Regulatory Commission (CSRC) announced restrictions on equity refinancings by listed property developers in late July that prevent using the proceeds to replenish capital, purchase land and repay bank loans.
Market participants expect similar restrictions to be imposed on the sector’s bond issues, such as limits on the use of proceeds, to quell a jump in mainland property prices.
S&P wrote last week that land prices had reached record highs in many tier-one and tier-two cities, as developers increasingly acquired land by buying smaller companies.
“We believe the land-grabbing frenzy will hurt profitability and cash flows of more aggressive developers,” wrote S&P analyst Matthew Kong. “Any faltering in property prices could place those developers between a rock and a hard place.”
A Shanghai-based underwriter at a mid-sized securities firm said he received guidance from the Shanghai Stock Exchange (SSE) last week saying the bourse would not encourage developers to use the proceeds to purchase new land, particularly in the third and fourth-tier cities.
In the domestic market, SSE and Shenzhen Stock Exchange oversee private placements of bonds, while public bond offerings are subject to CSRC approvals.
The frenzy in the stock exchange market followed a major relaxation by the CSRC in early 2015, which allowed unlisted companies to issue bonds through stock bourses.
The massive supply of bonds coincided with a booming property market, prompting the CRSC to react, market participants said.
Hhome prices in China’s biggest cities continued climbing in July, with Shenzhen rising nearly 41 percent on a year-on-year basis. Prices in Beijing and Shanghai were up 20.7 percent and 27.3 percent, respectively, according to official data.
In addition to restrictions on the use of proceeds, market participants also pointed out that regulators have issued oral ‘window’ guidance over the size of single offerings and the overall pace of debt financing from one issuer.
“An offering of 20 billion yuan in one go like Evergrande did last October will not happen again and the frequency of bond offerings will be closely watched,” said the Shanghai-based underwriter.
With onshore financing expected to shrink, some expect more Chinese developers to return to the offshore market for funding.
U.S. dollar-denominated offerings from Chinese property names have already picked up in the past month, with developers such as China South City Holdings and Road King Infrastructure helping to push issuance in that sector to reach over $2 billion since July.
The real estate sector’s offshore foray is not expected to slow down any time soon, with Jiayuan International and Powerlong Real Estate Holdings in the market last Friday, and Country Garden expected to come next. China Vanke also set up a $3.2 billion medium-term-note programme last week.
“Given the slowdown of onshore issuance and tighter offshore yields, we expect more Chinese property developers to access the offshore bond market in the second half of 2016,” said He Xuanlai, a credit analyst with Commerzbank.
However, some onshore bankers don’t agree they will lose clients to the offshore markets.
“Firstly, the onshore market will not shut down completely to property developers,” said the Shanghai-based underwriter.
“Secondly, as we spoke to our clients, AA rated developers can accept 9 percent or even higher yields in the event of regulatory tightening. The funding cost here has a lot of room to reach that level.”
( Editing by Steve Garton and Vincent Baby)
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