Chinese regulators are seeking more transparency from property developers, calling for more details about current debts, in order to rein in borrowing costs and quell broader financial impacts.
According to a document seen by Reuters, 12 well-established developers, which collectively account for 28 per cent of the homes sold in the country so far this year, were selected for a pilot debt reduction scheme.
Policymakers have rolled out the scheme, which will effectively limit developers’ annual debt growth to around 15 per cent, in an attempt to control unrestricted borrowing across the country’s property sector.
Developers will be required to provide details on items outside the usual financing channels like bank loans and bond issuance to the Ministry of Housing and Urban-Rural Development and the People’s Bank of China each month.
They will also need to provide debt figures on off-balance sheet projects as well as financial entity guaranteed returns and buy-back agreements—debt disguised as equity, as well as the amount of securitisation of receivables in the supply chain.
In August, regulators outlined caps on debt-to-cash, debt-to-assets and debt-to-equity ratios.
The cap for the debt-to-assets ratio will be set at 70 per cent, the cap for net debt to equity will be set at 100 per cent and developers should also have enough cash to match short-term liabilities.
Regulators have yet to announcement details of the implementation, but the industry expects the rules to be applied sector-wide in the first half of next year.
A leaked document last month regarding the cash flow of Evergrande, China’s second-largest developer by sales, further highlighted concerns of the liquidity flows of Chinese developers.
According to financial information firm Refinitiv, China’s property developers are among the biggest junk bond issuers in Asia, with a total of $46.23 billion being issued last year—double that of 2018.
Junk bonds—non-investment grade debt securities that carry a high default risk—usually come with higher interest rates to compensate for that risk.
In a recent note, ANZ Research said the Evergrande revelations, although unverified, has “heightened market concerns” about Chinese developers’ cash flow conditions and leverage ratio.
Privately-owned developer Macrolink Holding, became the first developer in the country to default on its bonds this year due to the pandemic, failing to pay investors principle and interest on ¥1 billion (A$211 million) worth of five-year bonds due March.
Tens of billions of dollars of bonds are set to mature next year, and analysts have warned that amid tightening financing conditions, developers who need to re-issue bonds to raise cash may face difficulties.
China’s housing market, which has slowly shown signs of recovery after the coronavirus crisis in recent months, will now afford bond investors greater opportunities to cash up developers looking to restart projects.