China tightening bond issuance by property firms in smaller cities

China’s regulators are trying to persuade small property companies, particularly those with ratings below “AA” by domestic credit rating agencies, to abandon their bond issuance plans in third and forth-tier cities, in an attempt to curb runaway property prices and soak up excess supply.

Although home prices in Beijing, Shanghai and Shenzhen are climbing, with firm demand, third- and fourth-tier cities continue to struggle under a large inventory of unsold flats, despite the country’s seemingly rigorous so-called “supply-side reforms” – market-orientated measures focused on reducing over-capacity.

China has never issued an official definition for third and fourth-tier cities. Beijing, Shanghai, Shenzhen and Guangzhou are considered its first-tier cities, while several provincial capitals and cities with specialised economic strengths were considered second-tier. Other cities were rated as third and fourth-tier.

“The China Securities Regulatory Commission (CSRC) recently has been delivering a clear signal to the market that bond issuance by property companies focused on development in third- and fourth-tier cities will be tightened,” said Liu Feifan, a property analyst with Guotai Junan Securities in Shenzhen.

“It seems that the Shanghai and Shenzhen bourses have been giving verbal guidance to property companies, particularly those privately owned and with relatively large land banks, to rein in their bond issuance, although the regulators have not issued any formal new rules yet,” he added.

Mainland newspaper 21st Business Herald reported on Wednesday that several brokerage companies had already suspended bond issuance for property companies in third- and fourth-tier cities.

A investment banker with a mid-size brokerage company in Shanghai, who asked to remain anonymous, told the Post it was already becoming “more prudent” when picking financing programmes for property companies.

“One of our clients, a Tianjin-based private property company, was persuaded recently by the Shanghai Stock Exchange to give up on its bond issuance plan,” he said.

But the financing of bigger companies has not been affected, as the CSRC generally avoids using aggressive tightening measures to maintain growth and credit stability.

“Bigger developers with “AAA” ratings are little affected. Bond issuance is still smooth for them and the coupon rate remains low,” the banker said.

Industry insiders also suggest the CSRC, which oversees the issue of corporate bonds by listed companies traded on a public exchange, informed investment bankers during a training course in July in Beijing that proceeds raised by property companies through refinancing should not be used to repay debt or to bid for land, but only be used in the building of existing projects.

The total debt of the country’s 119 listed developers rose 30 per cent to a record high of 2.8 trillion yuan (HK$3.26 trillion) at the end of June from a year earlier, Bloomberg data shows.

Their sales of onshore bonds surged to 458 billion yuan this year, compared with the 443 billion yuan for the whole of 2015.

SP Global Ratings has previously said surging leverage may prompt the authorities to curb onshore note sales by builders, to cool an overheating real estate market.

In addition to a tightening in the financial market, local governments are introducing new measures to curb soaring house prices.

Last month, major cities including Wuhan and Nanjing unveiled additional purchase restrictions, on top of measures announced earlier in the year, and Suzhou and Xiamen also rolled out tightening policies.

“This gradual expansion of tightening measures is a clear sign that aggressive housing stimulus has stopped, but the still very-limited-effect shows that an aggressive crackdown on housing is not happening either,” Gavekal Dragonomics analyst Rosealea Yao wrote in a note issued on Tuesday.

“It will get more challenging to keep housing and growth going in 2017, when a renewed easing cycle is likely.”