MNI: China Property Developers Look To Offshore Bond Market

--As Onshore Liquidity Tightens, Offshore Funding Beckons 

     BEIJING (MNI) - Chinese property developers are expected to dive deeper

into the offshore bond market this year amid greater financing and refinancing

pressures and as the government continues to implement stricter regulations on

onshore property market financing in an effort to rein in housing price growth.

     Chinese developers issued $38.86 billion worth of bonds in the offshore

market last year, almost triple the $14.06 billion of 2016, and quadruple the

$9.6 billion in 2015, according to Wind Information. Offshore bond issuances by

property developers last year comprised 12.38% of the total amount of U.S.

dollar-denominated bonds issued offshore by all Chinese companies, including

financial institutions, according to data from Golden Credit Rating

International Co., a ratings agency based in Beijing. 

     The increased issuance came amid the Chinese government's campaign since

late 2016 to rein in skyrocketing housing prices and curb a possible property

bubble. The government's measures -- housing purchase quotas on families and

individuals, higher mortgage rates, and limits on housing purchases by

non-residents -- have significantly weighed on housing sales, the main source of

property developers' incomes.

     To maintain adequate levels of liquidity, property developers are likely to

increase further this year their offshore bond issuance because property sales

growth is expected to continue to slow and could even turn negative, Zhao Yang,

chief China economist of Nomura, a Japanese investment bank, said in an

interview with MNI.

     --FUNDING COSTS RISING

     But yields on bonds issued by Chinese property companies in the offshore

market are also expected to continue their upward march this year -- in step

with U.S. interest rate hikes -- after an increase to a range of 3.6% to 11%

last year from 2.5% to 9.75% in 2016, Zhu Lin, senior property analyst at Golden

Credit, told MNI. This will make property developers' financing costs even

higher, adding to their burden. 

     In line with the government's financial deleveraging campaign, the National

Development and Reform Commission, which approves bond issuances, stopped

granting new quotas for offshore dollar bond issuances in the second quarter of

2017, but then lifted the curb in June for property developers.  

     The rise of onshore financing costs due to tightened liquidity amid the

deleveraging campaign, the need by developers to pay for increasingly expensive

land acquisitions as the industry undergoes consolidation, and the need to

refinance past borrowing have forced property developers to turn increasingly to

the offshore market for funds.

     --REFINANCING NEEDS TO REMAIN ELEVATED

     "Refinancing needs in the short term will remain at a high level as Chinese

developers' investments should still be large this year and next given their

record-high land acquisitions last year," Zhu said.

     Kaven Tsang, a Moody's vice president and senior credit officer with a

focus on the Chinese property sector, said in an interview with MNI that 55

property companies rated by the agency face heightened refinancing pressure,

which is expected to motivate some to use offshore funding channels to refinance

maturing or puttable onshore bonds.

     Chinese developers rapidly increased their onshore bond issues -- mostly

with three-year maturities -- in 2015 and 2016, while their offshore bond issues

-- mostly with five-year terms -- also rose significantly in 2013 and 2014,

according to Tsang. This means that many of these bonds will come to maturity

this year. 

     Data from Dealogic, however, shows that refinancing pressures will be even

higher for Chinese developers next year and in 2020. Around 73 offshore bonds

with a value of $22.56 billion are due next year, compared with 61 offshore

bonds worth $17.52 billion maturing this year. In 2020, $19.89 billion worth of

bonds are expected to mature, the data show.

     But Rachel Shao, regional research manager for Dealogic, told MNI she was

not sure property developers' offshore issues would increase much this year,

given that offshore issuance slowed down in each subsequent quarter last year --

from $10.1 billion in the first quarter to $9.3 billion in the second, $8.7

billion in the third and $8.0 billion in the fourth. While last year's trend may

be due to seasonal reasons or front-loading of financing at the beginning of the

year, a continuation could mean lower offshore issuance this year. 

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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