MNI EXCLUSIVE: China May Ease Debt Caps On Property Developers

The Chinese government is expected to fine tune recently-introduced caps on property developers' borrowing next year, to avoid widespread bankruptcies among smaller firms or sapping local government land sales, policy advisors told MNI.

While the so-called "three red lines" rule, which sets debt thresholds and was first mentioned in media reports in September, remains informal, some developers have already been asked to submit plans to cut debt under a pilot programme.

But concerns are growing of a cash crunch and corporate failures, especially among smaller firms, in a sector which is helping to drive China's economic recovery, advisors said. The rule could also limit developers' appetite for buying land from local governments -- a key source of revenue, and vital for servicing local administrations' own debt piles. At the same time, Beijing might be reluctant for now to allow local governments to compensate for falling land sales by boosting taxes, such as on existing properties, said Hu Gang, a professor with Jinan University and a city planning advisor for the Guangzhou government.

DIFFERING BUSINESS MODELS

The government could tweak its new requirements by varying thresholds for different categories of developer, recognising that cash flow models and debt servicing capacities vary between segments such as residential housing and commercial real estate, said Yan Yuejin, director of the E-house China Research and Development Institution.

Responding to the rules, developers have already become more cautious in acquiring land and have stepped up efforts to raise cash by finishing projects and selling houses, pushing national housing supply to a 10-year high, Yan said.

The three red lines, which cap ratios of debt to assets and to net worth, and of cash to short-term debt, would in their current form lower indebtedness by next year, advisors said. But this would come at the cost of driving some small and mid-sized companies out of business, said Yan and Hu, although they added that this should not undermine the property market.

Faced with debt limits, companies can still sell stocks or properties to finance their activities, said Meng Xiaosu, former president of the China National Real Estate Development Group Corporation.

IN BREACH

So far, of the top 30 Chinese developers, nine are in breach of all three parts of the debt rule, research from Huachuang Securities showed. This includes China Evergrande, which has become a poster child for corporate indebtedness with about $123 billion in outstanding loans. Another 16 companies have breached one or two of the thresholds, the securities house said.

Developers in breach of all three caps cannot increase interest-bearing liabilities. Even if a developer meets all the requirements, its liabilities can grow no more than 15% each year.

But the government should be wary of hitting sector which has been underpinning economic growth too hard, said Dong Zhiyong, head of Economic School at Peking University.

"It is still a pillar of China's future economic development and they (developers) have many difficulties," he told MNI.

Real estate investment increased 5.6% y/y in the first nine months of 2020, and the sector expanded by 2.6% y/y even at the peak of the Covid-19 crisis in the first half, propping up the investment-led economic rebound.