China to order developers to disclose commercial paper debt monthly – sources
HONG KONG (Reuters) – Chinese regulators want real estate developers to disclose details of the rapidly growing commercial paper issuance in their monthly reports, three sources said, as part of Beijing’s move to curb the increase debt in the real estate sector as the economy slows.
Real estate developers in the world’s second-largest economy are major issuers in the commercial paper market, which saw new issues worth 3.6 trillion yuan ($ 556.00 billion) in 2020, up 20 % compared to 2019.
Commercial paper, which is not counted as interest-bearing debt, is commonly used in the real estate industry as debt that promises construction suppliers payment at a fixed future date, usually within a year, although suppliers sell sometimes the paper before maturity at a small discount in the secondary market.
However, more and more real estate developers are turning to commercial paper to raise funds.
Pressure from regulators for greater oversight comes amid rising payment delays for these papers by companies such as China Evergrande Group, the most indebted developer with $ 88 billion in loans, China Fortune Land and Sichuan Languang Development.
It also comes as Beijing seeks to tackle unbridled borrowing by developers outside of regular funding channels like bank loans and bond issues to limit financial risk.
Regulators want more transparency about what developers are using the paper for and whether they fully disclose how much of these bills they hold, said one developer, who is aware of the discussion of the impending monthly disclosure requirement. all commercial papers that were yet to expire. .
Because he was not authorized to speak to the media, the developer declined to be named, as did another developer and financial services source who was also aware of the new requirement.
The People’s Bank of China did not respond to the request for comment.
The Chinese real estate market rebounded quickly from the shock of COVID-19, sparking concerns about financial risks and overheating. At the end of last year, the authorities began to step up restrictions on the sector, notably by limiting the accumulation of debt.
Twelve major developers, including Evergrande, must disclose their debt positions to channels such as banks, debt markets and off-balance sheet projects to regulators on a monthly basis as part of a pilot program put in place by the PBOC and housing authorities at the end of last year, but this had uncovered commercial paper.
Some developers, brokers said, issue the paper to associates and even shell companies, or issue multiple papers to a vendor against the same invoice, which then sells them directly in the secondary market and remits the money to the vendor. transmitter.
Many local financial institutions are also holders of these commercial papers, and some of them embed the instrument into trust and wealth management products for sale to retail investors, industry officials said.
“This is a legal loophole,” said Xinpeng Zhu, a lawyer at the Shanghai Rongying law firm that represents holders of commercial paper, including fund and wealth management companies, banks, brokerage houses and individual investors in cases of late payment.
Some plaintiffs had packaged commercial paper into wealth management products for sale to retail investors, he said.
Evergrande is the largest issuer of commercial papers. Its flagship unit, Evergrande Real Estate Group, held 205.7 billion yuan ($ 32 billion) of commercial paper at the end of 2020, 24% more than in 2019 and 390% more than in 2015, according to the documents filed.
The actual figure of paper in circulation for the Hong Kong-listed parent company could be much higher, analysts said, because not all instruments are consolidated in the financial statements of the holding company, and its other units also emit money. commercial paper.
Evergrande told Reuters that only an “extremely small” amount of its paper was not reimbursed on time. He stated that he had not issued any commercial paper to associates for financing purposes and that he was not aware that his papers were bundled into wealth management products.
Although Evergrande said last month that it was arranging payments for some of its project companies’ trade papers that were not paid back on time, the news sparked a massive sell off of its stocks and bonds.
Evergrande’s onshore and offshore bonds maturing in the next two years were trading at a yield of 35% and 23% respectively.
According to the Weipiaobao commercial paper market website, commercial paper from Evergrande Yuanlin, a unit that designs and builds gardens for the parent company’s projects, was selling 36% below its issue value on Tuesday. Other promoters’ commercial paper sold on average 20% below issue value.
($ 1 = 6.4748 yuan Chinese renminbi)
Editing by Sumeet Chatterjee & Simon Cameron-Moore