China Exchange Said to Mull Tighter Property Bond Sale Rules (1)

(Bloomberg) -- The Shanghai Stock Exchange is considering raising the threshold for property developers to sell exchange-traded notes, according to people familiar with the matter.

Under the rules being considered, the exchange would only accept note-offering applications from developers rated AA or higher, according to the people, who asked not to be identified because the details haven’t been announced. The firms would also need to meet at least one of the following requirements: be listed either onshore or offshore; be owned by a province, a provincial capital, some major city or the central government; or be among the top 100 builders ranked by the China Real Estate Association.

The rules would add to financing hurdles for developers after major cities unveiled curbs on speculative home buying following the government’s pledge to limit asset bubbles. Chinese real estate firms have sold 421 billion yuan ($63 billion) of onshore bonds so far this year, 300 billion yuan of which were regulated by the Shanghai bourse. The total figure in 2016 already exceeds the 397 billion yuan for all of last year, according to data compiled by Bloomberg.

“The sky-high volume of bond issuance from the middle of last year was no doubt a crucial force behind the overheated land market,” said David Yang, a Shanghai-based analyst at UOB Kay Hian Investment Co.

Rule Risks

Total debt for 143 listed developers rose 27 percent to a record high of 2.8 trillion yuan at the end of June from a year earlier, Bloomberg-compiled data showed this month. Developers’ profitability is worsening, with median gross profit margins dropping to 25 percent in the first half of this year, the lowest since at least 2008, according to Bloomberg data.

“If home sales decline following the government’s curbs, the reduction in bond financing would have a big negative impact on property developers’ cash flow and even credit profiles,” said Xu Hanfei, a bond analyst at Guotai Junan Securities Co. in Shanghai.

There were no other special rules for property bond sales before the current ones being considered, the people said. The new rules still haven’t been finalized, they said. The Shanghai exchange didn’t immediately respond to questions sent by Bloomberg via fax.

Builders can’t sell onshore bonds until they get approval from regulators.

(Adds analyst quote in fourth paragraph.)

--With assistance from Gary Gao and Jing Zhao To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net, Ling Zeng in Shanghai at lzeng30@bloomberg.net, Emma Dong in Shanghai at edong10@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Jessica Zhou at jzhou75@bloomberg.net, Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Ken McCallum

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