The following joke has circulated widely among Chinese internet users: A man tells his girlfriend that when property prices fall, he will buy a flat and marry her. She is instantly reduced to tears, realising how little he is committed to her.
It is not hard to see why she would be so upset. China’s property market has surged this year. In early December, just weeks before it was due to close its books for the year, Guangzhou-based China Evergrande revised its annual sales target up by 50%.
But the rise in Chinese property prices has worried the government, and regulators have tried to calm things down. Since September, local governments in 20 Chinese cities, including Shanghai and Shenzhen, had tightened rules for home purchases in a bid to damp resurgent demand and rein in excessive speculation.
Bond market regulators have also put up a roadblock — depriving Asia’s debt market of what was once a reliable source of supply.
Switching off
Chinese property companies issued more than $20 billion of dollar bonds in both 2013 and 2014, but in the last few years they have taken a step back, raising only around $10 billion in the dollar market, according to Dealogic. This is partly because international investors have begun to back away from the sector, scared off by bloated valuations.
For a long time, that was not a big problem — the onshore market was sufficiently liquid. But now the government is doing its best to limit both sources of funding.
Chinese regulators are discouraging mainland property companies from issuing bonds in both the overseas and domestic markets, according to several bankers, a move that appears designed to clampdown on debt-funded growth. The Shanghai Stock Exchange has also limited bond listings to only the safest property companies, imposing a domestic rating threshold of AA for any potential issuers.
The moves are intended to curb the amount of new capital raised by small developers and rein in speculative investment. Record-breaking land deals in the top-tier cities appear to have alarmed policymakers, showing that even some smaller properties may be out of reach of China’s all-important middle class.
“We understand that various financial regulators are seeking to stem the flow of speculative funds into the property market,” Chuanyi Zhou, a Singapore-based credit analyst at Lucror Analytics, an independent credit research firm, told FinanceAsia.
That is not easy. Chinese regulators need to strike a balance between maintaining “sustainable growth” in a sector that has taken on great economic significance without clamping down so far that a property slowdown leads to contagion, said Zhou.
Funding slowdown
Chinese property companies appear to have got the message. Most major property companies have stepped back from domestic bond issuance since late October, and issuance offshore has been piecemeal. But Karl Choi, a property analyst at Bank of America Merrill Lynch, said most issuers were still reasonably safe.
“It depends on how long the [onshore funding] window continues to be shut, but the liquidity conditions among Chinese property developers are in decent shape, at least in the short term,” said Choi.
There have been some noteable deals offshore, but few have been plain sailing. Central China Real Estate pulled off a $200 million deal in early November, but only after a dramatic increase in pricing. Country Garden closed a $350 million bond just over a month later, but only after abandoning an earlier attempt. Yields across the board have gone up.
“The overall funding condition is steady at home and in the offshore dollar market, but property developers are aware that the average spread on Chinese property dollar bonds has recently widened,” said Fred Tao, a Shanghai-based director of capital markets department at Powerlong Real Estate, which sold a $200 million bond in September.
Chinese property companies have been impacted by some factors entirely out of their control. The spike in volatility that followed the election of Donald Trump discouraged bond investors from buying riskier credits, dampening demand across the high-yield universe.
After the election, a number of issuers were forced to pull their deals, according to bankers. Yanlord Land, for instance, was looking to issue a new dollar bond in November, but delayed the plan after a tepid response on its roadshow, said one investor.
“The uncertainties associated with the upcoming Trump presidency’s policies have indeed dampened the ability — or perhaps more appropriately the willingness to come at higher coupons — of Chinese developers [in the dollar bond market],” said Lim Swee Ching, a Singapore-based portfolio manager at Western Asset.
For many of the bigger developers, there are still plenty of options. Country Garden, for instance, was able to close a $1.5 billion loan on the same day it issued its latest bond.
But although analysts and investors do not expect a major shutdown in financing conditions, they do say the days of easing funding are over.
