Read for 5 minutes Reuters, HONG KONG, July 16 – According to three sources, Chinese regulators want property developers to submit specifics of fast increasing commercial paper issuance in their monthly reports as part of Beijing’s effort to reign in swelling debt in the property industry as the economy slows. In the commercial paper market, real estate developers in the world’s second largest economy are major issuers, with new issues worth 3.6 trillion yuan ($556.00 billion) in 2020, up 20% from 2019. Commercial paper, which is not considered interest-bearing debt, is commonly used in the construction industry as a payable that guarantees payment on a future fixed date, usually within one year, though suppliers may sell the paper before maturity at a small discount in the secondary market. Property developers, on the other hand, have become more reliant on commercial paper to raise funds. The regulators’ push for more oversight comes as companies such as China Evergrande Group, the world’s most indebted developer with $88 billion in debt, China Fortune Land, and Sichuan Languang Development are experiencing increasing late payments for these papers. It also comes as Beijing seeks to reduce financial risk by addressing unrestrained borrowing by developers outside of traditional financing channels including as bank loans and bond issuance. Regulators want to know what developers are doing with the paper and whether they are completely revealing how much of it they own, according to a developer who is aware of the impending necessity to disclose monthly all commercial paper that has yet to mature. The developer, as well as another developer and financial sector source who were also aware of the new rule, declined to be named since he was not authorized to speak to the media. A request for comment was sent to the People’s Bank of China, which did not answer. The rapid recovery of China’s housing market following the COVID-19 shock has raised concerns about financial dangers and overheating. Authorities began tightening regulations on the sector late last year, including limiting debt accumulation. Twelve major developers, including Evergrande, are required to report their debt position to regulators every month through channels such as banks, debt markets, and off-balance sheet projects under a pilot scheme put in place by the PBOC and housing authorities late last year, but commercial paper was not included. Some developers, according to brokers, issue the paper to associates and even shell companies, or issue multiple papers to a single supplier against the same invoice, which the supplier then sells directly on the secondary market and returns the cash to the issuer. Many local financial institutions own these commercial papers, and some bundle them into trust and wealth management packages to sell to ordinary investors, according to industry officials. “It’s a legal loophole,” said Xinpeng Zhu of Shanghai Rongying Law Firm, who represents commercial paper holders in late payment issues, including fund and wealth management businesses, banks, brokerages, and individual investors. According to him, several of the plaintiffs packaged commercial paper in wealth management products to offer to individual investors. Evergrande is the largest commercial paper issuer in the world. According to records, its flagship unit, Evergrande Real Estate Group, has 205.7 billion yuan ($32 billion) in commercial paper at the end of 2020, up 24 percent from 2019 and 390 percent from 2015. Because not all instruments are incorporated into the holding company’s financials and its other entities also issue commercial paper, experts believe the actual number of outstanding paper for the Hong Kong-listed parent could be significantly higher. Only a “very modest” portion of Evergrande’s paper was not repaid on schedule, according to Reuters. It stated that it did not provide any commercial paper to associates for financing and that it was unaware that its papers were packaged into wealth management products. Despite Evergrande’s announcement last month that it was arranging payments for some of its project businesses’ commercial debt that had not been paid on time, the news sparked a selloff in the company’s stock and bonds. Evergrande’s onshore and offshore notes, which are due to mature in the next two years, were yielding 35% and 23%, respectively. The commercial paper of Evergrande Yuanlin, a business that designs and builds gardens for the parent firm’s projects, was selling at 36 percent below its issue value on Tuesday, according to the Weipiaobao website. Other developers’ commercial paper was selling for 20% less than the issuance price on average. 6.4748 Chinese yuan renminbi = $1 Sumeet Chatterjee and Simon Cameron-Moore edited the piece./n
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