Why China's Secretive Regulators Are An Issue for Asian Dollar Debt

  • Blocking firms from selling debt risks distress, defaults: S&P
  • Evergrande issues while other developers said to be blocked

China’s regulatory moves can appear secretive and scattershot to outside observers. When it comes to the country’s deleveraging drive, that’s presenting challenges for parts of the booming Asian dollar-bond market.

Chinese regulators have tightened restrictions on offshore corporate debt as they try to rein in record leverage built up after the global financial crisis. The sometimes opaque way the curbs are being implemented is making it difficult for cash-strapped firms to plan and undertake bond sales. Given needs to roll over maturing debt, the uncertainty could even boost the risk of defaults, according to S&P Global Ratings.

“It could cause some of these issuers to go into distress,” if restrictions prove to be prolonged and alternative funding channels aren’t available, said Christopher Lee, managing director of corporate ratings at S&P in Hong Kong.

The National Development and Reform Commission (NDRC) sowed confusion among real estate developers and local government financing vehicles after moves in April to start withholding approval for new foreign debt issuance by those issuers, according to bankers familiar with the matter.

The two groups of issuers are the ones most associated with China’s debt woes. While some debt sales are still going ahead, the basis for approval continues to be unclear to many market participants. An official in the foreign media office of the NDRC, China’s chief economic planning agency, said it wasn’t able to comment when contacted on Friday.

The NDRC -- which has said little publicly about any deleveraging initiative -- appears to be getting stricter about issuers following the rules with regard to their borrowing intentions. Some companies were identified this month for failing to register foreign debt sales. That could be negative for high-yield issuance, Citigroup Inc. said at the time.

Sales Delayed

Given how integral Chinese players are on both the buying and selling sides of the Asian debt market, this uptick in regulatory vigilance has wider implications, said Ken Hu, chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.

“The offshore market has become an extension of China’s local market,” he said. “Investors may need to pay attention to the risk of abruptly changing supply-demand market dynamics.”

A number of bond sales -- among them deals that have already been mandated -- are being delayed as companies wait for NDRC approval, according to eight bankers who didn’t want to be identified because they aren’t allowed to speak publicly and the details of the deals are private.

The restrictions -- which have also seen the NDRC’s Shenzhen branch limit offshore issuance to investment-grade firms -- have forced some companies to get creative.

After authorities stymied companies seeking approval to issue longer-term notes, developers including Greenland Holdings Corp., Modern Land China Co., and Fantasia Holdings Group sold offshore notes maturing in less than a year.

‘More Discerning’

Yet this route also could be blocked, leaving companies scrambling for fresh funding when the securities come due, says Jini Lee, a partner in Hong Kong at law firm Ashurst LLP. International ratings agencies often don’t rate short-term debt, so these notes are usually only attractive to private banks and private-wealth buyers, while buy-and-hold institutional investors steer clear, according to Lee. "With the lack of clarity here with approval, investors would need to step up their due diligence, and to be more discerning on the names that coming up to the market."

Another company, property developer China Jinmao Holdings Group Ltd., used the issuance quota of its parent, the oil firm Sinochem Group, to raise debt offshore, according to one banker and two investors with knowledge of the deal who asked not to be identified. Jinmao’s Hong Kong office didn’t immediately respond to a request for comment on Monday, and two calls to its Beijing headquarters went unanswered.

If there are curbs on sales from developers, though, they’re not being uniformly enforced. Shenzhen-based real estate firm Kaisa Group Holdings Ltd. and Guangzhou’s China Evergrande Group sold dollar debt this month.

Grand Sale

In fact, Evergrande, China’s most indebted property developer, last week pulled off the biggest ever high-yield dollar bond sale in Asia excluding Japan. And while many companies are still waiting for word from the NDRC on whether they can proceed with bond sales, the agency on Friday announced that a batch of firms had successfully registered for offshore debt issuance, including some developers. Incidentally, Evergrande’s bonds sold off on their first day of trading after the larger-than-expected deal.

For some investors, at least, concerns about Beijing’s approach are enough to give them pause, at a time when the country is trying gradually to boost foreign participation in its markets.

Read more about China’s long road to financial system integration here.

“The arbitrary rule changes by China’s regulators are convincing the buy side to skew away from Chinese supply,” said Sean Chang, head of Asian debt at Baring Asset Management Ltd. in Hong Kong. South Korean, Indian or Southeast Asian names could “fill the void” left by China, he said.

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