China debt crackdown: regulators asking property developers for more details than expected

HONG KONG (Reuters) - Chinese regulators are asking property developers to provide more details about their debts than markets had expected, as authorities look to tackle unbridled borrowing in the real estate sector, according to a document seen by Reuters.

FILE PHOTO: Lights are seen reflected on a window as a man works on renovating an office building near residential buildings in Beijing, China August 12, 2019. REUTERS/Florence Lo

Dubbed “the three red lines”, regulators outlined caps on debt-to-cash, debt-to-assets and debt-to-equity ratios at a meeting in Beijing in August between 12 major property developers and officials from the Ministry of Housing and Urban-Rural Development and the People’s Bank of China (PBOC).

The twelve companies, which collectively account for 28% of the homes sold in the country so far this year, were selected for a pilot debt reduction scheme as policymakers look to reduce broader financial risks.

The new policy will effectively limit developers’ annual debt growth to around 15% on average.

Property sources had said they expected a rush to get around the rules by moving more debt off balance sheets.

However, in a form that developers were asked to submit every month, the companies are also being asked for details on items outside the usual financing channels like bank loans and bond issuance. They will need to provide debt figures on off-balance sheet projects.

The contents of the document were confirmed by sources at two of the 12 firms in the pilot, who asked not to be identified due to the sensitivity of the matter.

Other debt information requested include details on projects that give a financial entity guaranteed returns and buy-back agreements - essentially a debt disguised as equity, as well as the amount of securitisation of receivables in the supply chain.

“The government is monitoring everything now, unless you want to cheat, but they will be able to tell from your monthly figures,” said a senior executive at one of the developers in the pilot scheme.

According to Chinese media, the cap for the debt-to-assets ratio will be set at 70%, the cap for net debt to equity will be set at 100% and the developers should also have enough cash to match their short-term liabilities.

The authorities have yet to announcement details of the implementation, but the industry expects the rules to be applied sector-wide in the first half of next year.

Pan Gongsheng, a PBOC vice governor, told a forum in Beijing on Wednesday the central bank has the draft of an overall assessment over property financing ready and it will make a public announcement at the right time, without further elaboration.

Analysts at ANZ estimate about one-fifth of real estate companies with China A-shares have leverage ratios exceeding the thresholds.

A sharp reduction in leverage could rattle credit markets and weigh heavily on the property sector, a key driver behind China’s swift economic recovery from the coronavirus crisis.

China Evergrande Group 3333.HK, the country's most indebted property developer, has been among those scrambling to raise money, with fears of a cash-crunch sending its shares and bonds skidding last month.

Reporting by Clare Jim; Additional reporting by Cheng Leng in Beijing; Editing by Kim Coghill