Mainland stock exchanges have suspended or terminated at least six asset-backed securities (ABS) issuances worth more than RMB 5.4 billion ($798 million) so far this month, igniting fears that authorities have broadened their clampdown on financing for Chinese real estate developers to include what had been a rapidly growing channel.
The suspensions, which were also reported by official new agency Xinhua, included funding said to be for long-term rental housing as well as products to support shantytown redevelopment, which had been, until recently, seen as government policy priorities.
Companies affected by the stock exchange decisions include major developers such as Poly Property and Landsea Group. However, on July 5th, the Shanghai Stock Exchange approved the issuance of RMB 10 billion in ABS by developer China Evergrande.
ABS Clampdown Adds to Funding Worries
On July 12th, Landsea Group’s RMB 787 million “Zhongshan Securities-Dongxing Finance 1 Landsea Housing Long-term Rental Apartment Phase 1 Asset-backed Security,” which was intended to support rental housing projects was suspended on the same day that Poly’s RMB 1.5 billion “Introduction on Everbright-Guosheng-Poly ABS for the Rest Payment of Purchase” was terminated.
That pair of shutdowns came just one day after Xinyuan Holdings’ RMB 1 billion ABS was suspended, and on July 6th, a RMB 346 million rental housing-backed ABS issuance by Baidu and Huatai Securities was also suspended for review.
Along with the Chinese government’s recent decision to put curbs on overseas bond issuances, the apparent change in ABS policy raises concerns over potential further narrowing of fundraising avenues for China’s cash-starved developers, especially in light of the tightening credit conditions at home.
Borrowing at 6% and Getting Paid at 3%
Analysts familiar with the sector indicated that, for the rental housing-backed securities, the policy shift may reflect growing pains for one of the government’s pet projects.
“As far as I understand, demand for the projects haven’t taken off as well as initially expected,” one analyst told Mingtiandi. The industry insider pointed out that many rental housing projects in China are averaging rental yields of around three percent, while borrowing costs via the ABS could be as high as six percent, especially for the smaller players with poorer ratings.
Potential misallocation of funds was also raised as a rationale for a crackdown. With other funding channels closing down, the analyst indicated that some of the larger players with multiple projects could have been issuing ABS labelled as rental housing-related to raise funds for other projects and circumvent current borrowing controls.
Shantytown Redevelopment Goes Out of Favour
The interruption to ABS for shantytown projects is another interruption to the flow of cash into what had been a mainland policy priority.
Earlier this month China’s Ministry of Housing and Urban-Rural Development (MOHURD) said that it would restrict subsidies to local governments for shantytown redevelopment in cities where home prices are growing rapidly, as part of its effort to cool down demand for more housing.
The country’s policy banks, including the China Development Bank (CDB), will not be providing the subsidies this year, unless local official can show that the city has an excess of unsold housing or relatively low housing prices, according to a MOHURD statement on July 12th.
Slowing Demand for Chinese Property Debt
Regardless of the regulatory action, demand for Chinese property debt has a surge deals earlier in the year met with lackluster demand from investors.
China’s National Development & Reform Commission (NDRC), meanwhile, is also considering plugging a loophole that allows companies to issue bonds maturing in 364 days without regulatory approval.
With nearly $70 billion worth of bonds maturing in the next 18 months, companies would now be left with few channels to find refinancing. Though companies can issue offshore bonds to refinance dollar-debt, the short-dated dollar issuances were a very popular product among Chinese issuers this year.