China Whacks Another Mole With Developers' Dollar Bonds in Focus

  • Ban may expose highly leveraged builders to a funding crunch
  • Developers will use expensive funding channels onshore: BOCHK

After China’s tightening financial conditions made it harder to sell debt at home, the country’s junk-rated issuers dived into the offshore market, selling record dollar debt.

Now, regulators seem to be cutting off that channel as well, in another case of officials moving to quell risks that keep cropping up in China’s patchwork financial system. Applications for new offshore bond deals by Chinese real-estate companies and vehicles set up by local authorities haven’t received approvals from China’s National Development and Reform Commission since April, according to bankers familiar with the matter.

One major potential problem with those issuers: they lack natural sources of dollar revenue to use for servicing dollar debt. That didn’t stop developers selling $10.6 billion dollars of notes offshore last quarter, the most on record according to Bloomberg-compiled data. The offerings slowed in the second quarter, to $1.7 billion so far.

For investors in the Asian high-yield market, there could be a near-term benefit: shrinking supply will pull down premiums on these dollar bonds, bankers and analysts said. There could also be implications for China’s property market, where regulators have sought to cool booming prices in the largest cities.

"The main driver behind this move is to tighten the property market, as recent data shows housing inflation remains resilient," said Claire Huang, greater China economist at Societe Generale SA in Hong Kong. "In a broader context, the authorities -- emboldened by positive economic growth momentum -- look determined to see regulatory tightening through," she said.

The restrictions may pressure the highly leveraged Chinese real estate developers’ financing if the ban holds for the longer term. Market participants at Bank of China Hong Kong Ltd., Industrial & Commercial Bank of China Ltd. and Guotai Junan International Holdings Ltd. all expect the builders to turn to alternative funding channels onshore.

How successful the developers are in tapping fresh funding sources could affect their ability to roll over outstanding debt. Zhi Wei Feng, Singapore-based head of China corporate credit research at Standard Chartered Plc, said "those that don’t have funding flexibility and are highly leveraged will be most at risk of funding crisis.”

Those with the greatest liquidity risk are most likely to be smaller-sized companies with single B ratings, said Ross Lee, desk analyst at Bank of China Hong Kong Ltd. "They will have to tap the onshore more expensive alternative financing channels such as trust loans,” he said.

China’s policy makers have demonstrated flexibility in the deleveraging campaign that kicked off with the central bank boosting money-market rates late last year -- moving to relax conditions should there be perceptions of a broader threat to growth. That leaves a question mark around the permanence of the latest regulatory moves.

After spearheading the effort to reduce financial leverage, the People’s Bank of China added liquidity this week -- read more about that here.

"There’s uncertainty on how long the ban will last," said Ben Sy, head of fixed income, currencies and commodities at JPMorgan’s private-banking unit in Asia. "In near term, there will be less supply from developers in the second quarter, so with still very strong demand the existing bonds will be bid up."

— With assistance by Narae Kim

— With assistance by Narae Kim

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