China Developers Face Threat of Funding Cost Jump Amid Curbs

(Bloomberg) -- China's developers face higher financing costs after regulators stepped up efforts to rein in the borrowing that has fueled a red-hot property market.

The Shanghai Stock Exchange raised the threshold for property firms to sell the bonds that it regulates, people familiar with the matter said Friday. Along with curbs on home sales and mortgages, the rules will likely strain access to cash and prompt more builders to seek money overseas, pushing up dollar note yields, according to Australia & New Zealand Banking Group Ltd. and Bank of China Hong Kong Ltd.

China's real estate industry accounts for about a third of economic output, raising the stakes as the government tries to thread the needle in preventing a bubble without prompting broader fallout. The sector accounted for 63 bankruptcies this year, the biggest contributor to 507 restructurings in the nation. Goldman Sachs Group Inc. said Oct. 28 investors should reduce exposure to Chinese investment-grade and high-yield property bonds.

“I'm quite concerned on Chinese property,” said Jenny Zeng, Hong Kong-based portfolio manager & head of credit research for Asia fixed income at AllianceBernstein. “For Chinese developers, we are underweight as sales will slow down and margins will be further squeezed.”

While developers can still raise cash in the dollar bond market at near record lows, the financing costs have already been inching up in recent months as authorities' determination to cool the real estate market becomes clearer. Average yields on dollar bonds from Chinese developers and other Asian high-yield issuers have risen 15 basis points this month to a four-month high of 6.6 percent, after dropping to a record low in September.

The jump in dollar bond yields comes at a bad time for many Chinese developers. They sold $6 billion in offshore notes in the third quarter, the highest since 2014, while their onshore offerings slumped to the lowest in five quarters.

Securities of Jiangsu Future Land Co. and Yuexiu Property Co., which focus on development in second-tier cities, fell Monday. The yield on Future Land's 2019 dollar bond climbed four basis points to 6.63 percent, the biggest jump since Oct. 12. The rate on Yuexiu Property's 2023 note increased four basis points to 4.2 percent, the biggest increase since Sept. 14.

For more details on the new rules, click here.

“The rally in offshore property bonds likely has come to an end and from now on we will see rising yields,” said Owen Gallimore, a credit analyst in Singapore at ANZ. “The latest bond sale rule is part of a gradual trend that is seeing funding tightened.”

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net, Lianting Tu in Hong Kong at ltu4@bloomberg.net, Denise Wee in Hong Kong at dwee10@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Sandy Hendry

With assistance from Lianting Tu, Denise Wee, Judy Chen