MNI: China Likely To Ease Developer Borrowing Restrictions

China will likely relax its "three red lines," easing borrowing restrictions on property developers alongside other stimulus to boost home sales as bond defaults peak following two years of deleveraging, policy advisors and market analysts told MNI.

The three red lines, implemented in August 2020, cap debt-to-cash, debt-to-assets and debt-to-equity ratios to restrict the amount of new borrowing developers can raise each year, while prompting them to provide greater detail on their liabilities.

Property companies have faced a difficult funding environment over recent years as appetite among the country’s banks for real-estate risk has fallen, despite repeated vows from top policymakers to ensure reasonable financing for all types of developers, said Xie Yifeng, dean at the China Urban Real Estate Research Institute and a Ministry of Housing and Urban-Rural Development consultant. He noted authorities will likely ease the three red lines alongside regulatory caps on banks that limited their real-estate risk exposure.

SUPPORTS FAIL

Other attempts to support the sector have proved less successful, such as the "three arrows" programme launched November 2022 to open credit, bond and equity financing channels to the country's property developers.

Xie noted real-estate companies had only used about CNY1 trillion of the circa-CNY7 trillion intentional credit line originally signed by banks and developers included in thesupport package.

In October, total financing of 80 typical real-estate companies dropped by 51.9% y/y to CNY21.36 billion, the lowest single-month level since 2020, data by the China Real Estate Information Corporation showed.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co, noted authorities should encourage banks to offer merger and acquisition financing and support high-quality developers to issue debt in the interbank market. Meanwhile, local governments should ease restrictions on home purchases, mortgages and sales to boost demand, while authorities should relax borrowing conditions for buyers, lower the five-year Loan Prime Rate, and reduce existing mortgage rates for second homes.

The People's Bank of China revealed Monday both the one-year and five-year LPR remained unchanged at 3.45% and 4.2%.

Yan Yuejin, director at the E-house China Research and Development Institution, suggested the government should promote sales to boost developers’ coffers, as deposits and pre-sale payments have become their largest source of funds.

DEFAULT CLIMAX

Only eight developers have defaulted in 2023 to date, compared to 43 in 2022 and 16 in 2021. While the peak may have passed, highly leveraged companies remain at risk and private developers could still fail to meet repayments as the market continues to weaken due to declining sales, said Liu Shui, corporate research director at the China Index Academy.

Most real-estate bonds in arrears this year, about CNY168.9 billion, have extended – a 16.9% y/y increase – while the amount of real defaults has decreased by 6.6% to CNY33.7 billion, according to Ming Ming, chief economist at CITIC Securities.

However, think tank ANBOUND Analyst Wei Hongxu believes defaults by leading developers including Country Garden and Sino-Ocean Group indicate conditions could still deteriorate. The market required improved sales to stabilise, alongside substantial debt restructuring that will require liaising with creditors and investors to revitalise assets, Wei told MNI.

The Shenzhen municipal government recently gave its “full support” to Vanke, the country’s second largest developer by sales, after its bonds and equity experienced considerable volatility. However, the company has USD1.4 billion equivalent of offshore transactions maturing next year and investors are concerned it may default should financing conditions remain harsh, Xie warned.