Chinese policymakers make debt investors guess

China’s highest economic planning commission gives global fixed-income investors a puzzle over real estate developer debt.

The National Development and Reform Commission has acted as a watchdog for offshore debt issuances by Chinese companies since 2015, forcing issuers to actually obtain its approval before going to market.

Last year, the NDRC shut down Chinese real estate developers from the market for several months over concerns over rising offshore debt. Last month, the regulator considered requiring companies to seek approval for bonds with terms of less than one year, which so far have not been subject to NDRC oversight.

The ups and downs of policy over the past year have left investors guessing the direction of the commission’s long-term policy for offshore debt issuance among real estate developers.

“What we don’t know is what the NDRC wants to do over a longer period,” said Alaa Bushehri, head of emerging market corporate debt at BNP Paribas Asset Management.

This year, there have been no known instances where developers have been barred from entering the market, but “if you had a situation where you have immediate refinancing needs and can’t access it, that would make it right. different ”.

Some $ 24 billion in debt from Chinese real estate developers will fall due in 2019, up from $ 6.5 billion this year, according to Dealogic data.

Investors typically bought bonds with maturities of less than one year with the belief that developers would refinance at maturity rather than repay. Many developers have not planned to pay off in full at the end of the one-year period.

Market insiders have warned that a move to further regulate short-term debt deals could impact the ability of real estate developers to refinance existing offshore debt and pose more risk to investors.

“While encouraging industry-wide deleveraging remains a policy goal for the NDRC, this goal must be properly balanced against ensuring uninterrupted access to capital markets for existing issuers,” said Jason Elder, partner at Mayer Brown in Hong Kong. “The NDRC will likely be cautious in assessing these sometimes competing goals.”

Much of the NDRC’s offshore debt policy appears to be politically motivated. In 2017, as the delicate Chinese Communist Party congress approached, the regulator stopped approving debt issuance from offshore Chinese real estate developers. With the meeting closing at the end of October, companies made a rapid comeback.

In late June, the FT reported that the NDRC was considering closing the loophole for short-term debt issuance, either by banning sales of short-term notes or including them in the approval process. The NDRC subsequently denied considering such action.

Some bankers have argued that recent defaults by Chinese companies have caused investors to look beyond NDRC policies and more to the fundamentals of Chinese real estate developers.

“You find that foreign investors are fleeing to quality,” said Jamie Tadelis, SC Lowy’s co-sales manager. Investors will now ask questions such as “which ones are too big to fail and which ones can be consolidated into other developers,” he added.

Carol M. Barragan

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