China’s property developers seek to dodge new rules with shift of debt
China is tackling unbridled borrowing in the real estate development sector anew with caps for debt ratios. But sources at developers say a rush to get around the rules by moving more debt off balance sheets is on.
Dubbed "the three red lines", Chinese regulators outlined caps for debt-to-cash, debt-to-assets and debt-to-equity ratios last month at a meeting with 12 major property developers in Beijing. Though not yet officially announced, developers expect the rules to be applied sector-wide as soon as Jan. 1, 2021.
The move has sent shock waves through the industry, sources at four Chinese property developers told Reuters. "Every company is worried...so everyone is using their own methods, and it's all about off balance sheet: off balance sheet projects and off balance sheet debts," an executive at a mid-sized developer told Reuters.
"Liquidity is still abundant, both onshore and offshore, you just need more innovation in fund raising."
Moving debt off books by setting up ventures with other developers to purchase land is already common practice and will intensify, said the sources, declining to be identified due to the sensitivity of the matter.
Other methods that effectively disguise debt as equity - such as investing in a project with a financial entity which gets guaranteed returns and an agreement for their stake to be bought back - will continue to gain in popularity, the sources added.
But regulators have been loud and clear in their messaging and will likely step up countermeasures to rein in projects aimed at hiding debt, analysts and economists say.
Regulators have since 2016 sought to limit lending to the sector, including by trust funds and other parts of China's shadow banking industry. They have also sent developers with many joint ventures questionnaires asking them to account for their business practices.
"I can't say this loophole has been completely sealed but for sure the room to manoeuvre is not as big as before. The same applies to disguising debt as equity - so unless there are new methods that regulators are unaware of, it'll be hard to do in large volumes," said Rosealea Yao, China investment analyst at Gavekal Dragonomics.
China's property market was among the first to recover after the coronavirus-hit economy reopened this year, thanks to cheaper credit and the relaxation of urban residential curbs. Supported by robust sales, real estate investment in the country climbed 11.8 per cent in August, the fastest pace in 16 months.
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