Chinese developers get state help to tap the bond market

China is helping some powerful developers tap into the domestic bond market, the latest move to prop up the ailing real estate sector amid a broader economic slowdown.

With the industry crisis, markets in China and abroad are mostly closed to privately owned developers. New deals address this problem by coating some bonds with credit derivatives, so that buyers are protected from the risk of default.

The initiative comes on the heels of other measures, including the central bank’s cut in mortgage rates for first-time home buyers, and relief in various areas for things like down payments and home buying restrictions.

However, investors and analysts warn that it will take time for the property market to stabilize, with sentiment waning among potential homebuyers and financial distress among developers spreading. Meanwhile, strict lockdowns in many cities dealt another blow to consumer confidence and disrupted sales of new apartments.

Country Garden Collectibles company

2007 1.65%

Longfor 960 0.38%

Group Holdings Ltd and Media Real Estate 3990 2.52%

Bulletins show that Holdings Ltd. is selling yuan-denominated local bonds this week. The three developers, who are not backed by the state, aim to raise up to 2 billion yuan, or $296 million.

Wind data showed that private developers have sold only 11.8 billion yuan of internal bonds so far this year, compared to 190 billion yuan issued by their state-owned peers.

Deal insurance companies and China Securities Finance Corp. will sell. Also credit derivatives to accompany some of the debt, according to transaction letters seen by The Wall Street Journal, and people familiar with the Longfor bond sale.

The messages showed that Country Garden and Midea deals would be accompanied by credit default swaps, while a Longfor deal could use such a swap or another similar instrument known as a credit risk mitigation note.

Buyers of these swaps and collateral will pay an additional premium to reduce credit risk, meaning their investment is ultimately similar to a safer but lower-yielding government bond. Current rates in China’s credit markets mean it is still willing to earn a higher interest rate than risk-free sovereign bonds, despite credit default swaps being used as a form of insurance.

Instead, default risk will be borne by insurers and the CSFC, which are owned by China’s major stock exchanges and one of the country’s clearinghouses.

Country Garden confirmed that the default swap contracts will be written alongside its bond deal. The other two developers did not respond to requests for comment.

Analysts said it was unlikely that financially weaker developers would be able to make similar deals. Brokers may be reluctant to take on increased default risk, even if it means charging higher swap premiums, and Chinese regulators are limiting overall exposure to default swaps.

Yao Yu, founder of YY Rating, an independent Chinese credit research firm, said the system will work with developers with relatively strong fundamentals whose existing bonds are not traded cheaply. “As people say, it is easy to persuade people to push the boat with the current, but it is very difficult to persuade them to do it against it,” Mr. Yao said.

“This is a top-down matter that regulators facilitate,” he said, adding that securities firms have treated it as a political mission.

Credit and default swaps have been used internationally for decades, but were only introduced in China in 2016 by the regulator of the interbank bond market, one of China’s major debt markets. It became widely used in 2018 when defaults by privately owned companies started to recover.

Credit guarantees are similar to default swaps, but unlike those instruments they are publicly traded, insuring only against an issuer that fails to meet its obligations for one specific bond.

Recent data highlights the scale of the challenge facing the real estate sector in China. Government statistics released Monday showed that new homes launched and home sales by value in April fell 44% and 47%, respectively, compared to the previous year, while mortgage demand also declined.

Even the relatively moderate official data flashes a warning sign, with a monthly gauge showing new home prices falling year-over-year for the first time in more than six years.

An eventual market rebound will not be of much benefit to developers with imminent funding needs, said Kevin Tsang, an analyst at credit rating firm Moody’s Investors Service. “The market will definitely be polarizing, with the strong taking a larger share of the weaker markets,” Tsang said.

write to Rebecca Feng at

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