China State-Run Developers to Sell Yuan Debt in Easing Sign

(Bloomberg) -- Chinese state-owned developers are about to test investor demand for yuan bonds with a flood of issuance.

China Merchants Shekou Industrial Zone Holdings Co., Poly Developments & Holdings Group Co. and Bright Real Estate Group Co. received approval to sell a combined 8.6 billion yuan ($1.3 billion) of local bonds on the interbank market this week. If successful, that would make November the strongest for issuance in eight months.

Positive demand for the bonds could prompt other property firms to follow suit, potentially easing a historic liquidity crunch in pockets of the real estate sector. Authorities are likely to loosen curbs for the industry to sell yuan notes, enabling banks to provide “blood transfusions” by investing in the bonds, state media reported last week. Some real estate companies are struggling to refinance debt amid a housing slowdown, strict rules on borrowing and elevated dollar bond yields.

“Such a big size of one-time issuance is indeed rare,” said Yang Hao, fixed income analyst at Nanjing Securities Co. “It sends out an ice-breaking signal that policy makers want to shore up market confidence, and given the better quality of the developers, coupon rates will be low with the support from banks.”

Developers’ bonds and stocks rallied last week on news of the potential relaxing of debt rules, with a gauge of Chinese junk dollar notes jumping the most since March 2020. Still, many lower-rated builders remain shut out of the dollar bond market, prompting a scramble for cash as firms seek to survive the cash squeeze. Chinese high-yield junk notes declined 2 to 3 cents on the dollar Tuesday.

The easing signal was transmitted during a meeting last Tuesday between some developers and the industry body that helps regulate corporate bond issuance on the interbank market, according to the Securities Times. 

China Merchants Shekou plans to raise 6 billion yuan through three tranches this week, according to company filings. That’s more than its total via interbank bond sales year-to-date, according to data compiled by Bloomberg. 

Poly Developments plans to sell 2 billion yuan worth of local bonds this week, while Bright Real Estate targets as much as 580 million yuan in a three-year note. The prospective offerings are aimed at refinancing maturing debts. 

“The bond sale plans from state-owned developers show they also face refinancing pressure” despite having met the government’s three red lines, said Wu Jinduo, an analyst at Great Wall Securities Co. “Investor appetite for their bonds is expected to increase as fundamentals for the industry improve.”

Still, even with initial signs of policy easing boosting dollar bond prices, risks remain elevated. While the mainland interbank market offers a cheaper source of funding than the offshore market, borrowers typically cannot use funds sold onshore to service their offshore obligations. Analysts have also cautioned looser controls on the issuance of local currency notes would open refinancing channels only for higher-quality developers.

Issuance by Chinese real estate companies on the interbank market has dropped from a peak in the third quarter of last year, after the central bank introduced the three red lines -- debt limits for the industry. Developers sold 59.2 billion yuan of such securities last quarter, the least since the end of 2019, according to data compiled by Bloomberg.

China’s home slump deepened in October as declines in prices, sales and property investments widened. New-home prices in 70 cities slid 0.25% last month from September, when they fell for the first time in six years, National Bureau of Statistics figures showed Monday. Residential sales dropped 24% from a year earlier, Bloomberg calculations based on official data showed.

Despite the slowdown, the government is unlikely to reverse course on its efforts to deleverage the property industry. China’s banking regulator vowed late Friday to curb the “financialization of real estate” and prevent the sector from turning into a bubble. 

On top of the two exchanges in Shanghai and Shenzhen, China’s interbank bond market includes paper issued by state-run and private firms and bought by banks and other institutional investors. Its notes outstanding make up nearly 90% of the total size of Chinese bond markets, according to data compiled by Bloomberg.

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