Chinese property developers blur red lines

Nearly all the country’s listed real estate companies are crossing at least one of Beijing's three leverage ratios, known as red lines, that are designed to curb wild growth

  
A general view of the financial Central district in Hong Kong, China July 25, 2019. Image used for illustrative purpose.

A general view of the financial Central district in Hong Kong, China July 25, 2019. Image used for illustrative purpose.

REUTERS/Tyrone Siu

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

HONG KONG - Keeping Chinese property developers inside new regulatory boundaries could be challenging. Nearly all the country’s listed real estate companies are crossing at least one of Beijing's three leverage ratios, known as red lines, that are designed to curb wild growth, according to one estimate. With so many crafty manoeuvres available, the crackdown will require extra vigilance.

Take $26 billion Country Garden, the country's biggest developer by sales. It has abundant cash and may only be overstepping the liabilities-to-assets ratio cap of 70%. By taking small equity stakes in joint ventures, however, its higher debt commitments could be obscured.

Revenue and advance payments derived from Country Garden’s own projects, and partnerships it controls, combined to make up just 60% of total contract sales from January to June 2020, according to the National Institution for Finance and Development state think tank. That suggests considerable debt may be underreported, including from JVs that Country Garden does not consolidate. The lower the proportion, the bigger the potential problem. Sunac’s is just 41%, based on the research.

Another loophole developers exploit is selling small JV equity stakes to shadow bankers or other investors. The extra capital helps bid for land or finance projects, but there is often an agreement to buy back the position at a fixed, higher price. That makes it an obligation that doesn’t increase debt ratios.

Even harder to detect can be shell companies used to fund developments. In 2018, for example, a construction labor supplier with investments in Country Garden projects borrowed against 1.5 billion yuan ($232 million) of its own shares, with Country Garden backstopping the loans. Guangzhou R&F Properties did something similar involving the local government last month, property website Fang.com reported.

Securitising receivables from contractors is another way to channel borrowed money to developers without increasing their debt on paper. Research outfit Rhodium Group estimates such financial engineering reached a record $24 billion between January and November. Smaller companies also can seek interest-free loans from big shareholders and record it as an account payable, evading regulatory measures. With all these artful ways around the red lines, Chinese authorities will have to be equally creative reading between them.

CONTEXT NEWS

- China's deputy housing minister urged authorities in major cities to take steps to curb property market speculation following a recent surge in residential real estate prices, state media Xinhua reported on Jan. 26.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Jeffrey Goldarb and Sharon Lam) ((yawen.chen@thomsonreuters.com; Reuters Messaging: yawen.chen.thomsonreuters.com@reuters.net))

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