China requires developers to disclose monthly commercial paper debt

© Reuters. File Picture: On March 19, 2021, the apartment building in Taoyuan Xindu Vacancy City developed by China Fortune Land Development was seen in Zhuozhou, Hebei Province, China. REUTERS/Lusha Zhang

Claire Jim

HONG KONG (Reuters)-Three sources said that Chinese regulators want real estate developers to disclose in their monthly reports the details of the fast-growing commercial paper issuance, which is what Beijing controls the debt inflation of the real estate industry as the economy slows. Part of the initiative.

Real estate developers in the world’s second-largest economy are the major issuers of the commercial paper market, with newly issued bonds worth 3.6 trillion yuan (US$556 billion) in 2020, an increase of 20% over 2019.

Commercial bills, which are not counted as interest-bearing debts, are usually used as payables in the real estate industry, promising construction suppliers to pay on a fixed date in the future, usually within one year, although suppliers sometimes sell small bills in the secondary market before maturity. discount.

However, real estate developers are increasingly using commercial paper to raise funds.

The regulator’s push to strengthen supervision comes at a time when companies such as China Evergrande Group, China Fortune Land and Sichuan Languang Development (the most indebted developer with US$88 billion in borrowings) have increased overdue payments for these bills.

At the same time, Beijing hopes to resolve the unscrupulous borrowing of developers outside of the usual financing channels such as bank loans and bond issuance to curb financial risks.

A developer who understands the upcoming discussion of requiring monthly disclosure of all unexpired commercial papers said that the regulator wants to increase transparency, the purpose of developers using the papers and whether they fully disclose the number of these papers they hold. .

Because he has no right to talk to the media, the developer declined to be named, and another developer and financial services person also knew about the new requirements.

The People’s Bank of China did not respond to a request for comment.

The Chinese real estate market rebounded rapidly from the impact of COVID-19, raising concerns about financial risks and overheating. At the end of last year, the authorities began to tighten restrictions on the industry, including restrictions on debt accumulation.

At the end of last year, the People’s Bank of China and the housing management department implemented a pilot program. 12 large developers, including Evergrande, must disclose their debt status to regulators through channels such as banks, bond markets, and off-balance sheet projects, but not commercial bill.

Legal loopholes

Brokers said that some developers issue bills to associates or even shell companies, or issue multiple bills to suppliers based on the same invoice, and then the suppliers sell them directly on the secondary market and return the cash to the issuer.

Industry officials said that many local financial institutions also hold these commercial papers, some of which package this tool into trust and wealth management products and sell them to retail investors.

“This is a legal loophole,” Zhu Xinpeng, a lawyer from Shanghai Rongying Law Firm, represented commercial paper holders including fund and wealth management companies, banks, brokerages and retail investors in the delayed payment case.

He said that some plaintiffs packaged commercial paper in wealth management products and sold them to retail investors.

Evergrande is the largest issuer of commercial paper. The documents show that its flagship unit Evergrande Real Estate Group has 205.7 billion yuan (32 billion U.S. dollars) worth of commercial paper at the end of 2020, an increase of 24% and 390% over 2019 and 2015, respectively.

Analysts said that the actual number of outstanding notes of the Hong Kong-listed parent company may be much higher because not all instruments are incorporated into the holding company’s financial statements, and other departments also issue commercial paper.

Evergrande told Reuters that only a “very small amount” of bills was not repaid on time. It stated that it did not issue any commercial papers to associates for financing purposes, nor did it know that its papers were packaged into wealth management products.

Although Evergrande said last month that it was arranging payments for commercial paper that some project companies did not repay on time, the news triggered a sell-off of its stocks and bonds.

The yields of Evergrande’s onshore and offshore bonds due in the next two years are 35% and 23%, respectively.

According to the commercial paper market Weipiaobao website, the commercial paper of Evergrande Yuanlin, a subsidiary that designs and builds gardens for the parent company’s project, was sold on Tuesday at 36% below the issue price. The average selling price of commercial paper from other developers is 20% lower than the issue value.

($1 = 6.4748 renminbi)

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