As China’s economy picks up after the COVID-19 pandemic, the last thing you might expect is a renewed credit squeeze in the real-estate industry. So the imposition of leverage thresholds for developers has come as a surprise, weighing on shares of highly indebted companies from China Evergrande Group (恒大集團) to Greenland Holdings Corp (綠地控股集團). The concerns might be overstated.
China’s widely circulated, though unofficial “three red lines” policy sets limits on bank borrowings: a 70 percent ceiling on developers’ debt-to-asset ratio after excluding advance receipts; a 100 percent cap on the net debt-to-equity ratio; and a requirement that short-term borrowings do not exceed cash reserves, according to S&P Global Ratings.
UBS Group AG has listed nine publicly traded companies that would breach the three thresholds.
The policy builds on tightened restrictions in the interbank bond market. Under guidelines issued last month, homebuilders can sell new bonds only to refinance existing debt. Funds raised cannot exceed 85 percent of companies’ total outstanding debt, preventing them from rolling over all their liabilities.
China’s real-estate prices have done well this year, helped by stimulus measures in response to the pandemic. Prices rose 3.6 percent in tier-1 cities , 5.3 percent in tier-2 cities, and 4.4 percent in lower-tier cities in July from a year earlier, according to Moody’s Investors Service.
Restricting the flow of credit to developers might help curb a glut of housing supply, with the stock of unsold homes standing at 480 million square meters across 100 cities.
While that is a challenge to companies such as Guangzhou-based Evergrande, which at one point was the world’s most indebted developer, the big companies have always found ways to raise funds.
Evergrande, for example, is considering listing its property management arm in Hong Kong. Valuations for management businesses are higher than for homebuilders because of their sticky client base and steady cash flows.
It is not alone. In the past few weeks, a wave of developers has jumped on the property management bandwagon including China Resources Land Ltd (華潤置地), Sunac China Holdings Ltd (融創中國控股), KWG Group Holdings Ltd (合景泰富) and Jinke Properties Group (金科地產集團股份).
All filed prospectuses online in the past few weeks, with state-owned China Resources planning to raise as much as US$1 billion from an initial public offering of its property management arm, Julia Fioretti of Bloomberg News has said.
That would make it one of the largest such flotations in the city.
The overseas debt market also remains open. Shenzhen-based Kaisa Group Holdings Ltd (佳兆業集團), which gained notoriety in 2015 for being the first Chinese developer to default on a US-dollar bond, had US$2.65 billion in subscriptions for a US$400 million issue this month.
Even onshore, there are options: Greentown China Holdings Ltd (綠城中國), for instance, is raising 950 million yuan (US$139 million) selling bonds on the stock exchange, after garnering 15 billion yuan from the interbank market as recently as April.
The bottom line is that the property industry is just too important for the Chinese government to squeeze funding to the point where defaults might occur.
By some measures, housing and related sectors, such as home furnishings, make up one-quarter of China’s GDP.
Moody’s associate managing director Franco Leung (梁振邦) has said that the government would continue to fine-tune regulatory measures and control credit growth to avoid a run-up in prices.
Restrictions on home purchases in cities such as Shenzhen have already had an effect.
The current round of credit tightening is unlikely to be the end. With few investment outlets apart from the volatile stock market, real estate would always attract buyers, even if Chinese President Xi Jinping (習近平) has admonished that homes are for living in and not speculation. Few things are safer than houses in China.
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners
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