Support for Private Property Developers Expands in China

China Bond Insurance Co Expands Support to Private Property Developers

China’s state-backed bond insurer is expanding support to a handful of private property developers, including Longfor and CIFI Holdings, according to sources. The developers will issue onshore medium-term notes with guarantee from China Bond Insurance Co, they said.

The guarantees will help reduce the impact of debt on property developers’ liquidity. They are similar to construction guarantees offered by banks and guarantee companies, but offer a higher level of protection.

Surety Bonds in China

Traditionally, property developers in China obtained construction guarantees from banks and guarantee companies in exchange for collaterals. This negatively impacted the cash flow and liquidity position of property developers. Surety bond insurance enables property developers to obtain insurance coverage for their projects without having to post collaterals, thus alleviating their financial burden.

Insurers in the surety bond market in China offer diversified protections, with some insurers offering unique forms of risk protection that meet specific social needs. The industry remains competitive with low loss ratios.

A contract surety bond guarantees that all expenses and costs associated with a project will be paid. A performance surety bond ensures that a contractor will perform the work as stipulated in the contract agreement. It also protects investors and principal owners from incomplete work or unpaid expenses. It is a necessary and important security for project financing. There are different types of contract surety bonds depending on the scope and size of the project.

State-Owned Enterprises

While China’s two-decade push to privatize state-owned firms has created better-performing companies, many former SOEs continue to benefit from government subsidies and lower interest rates. This supports their profitability and enables them to lobby for regulations that drive out competitive private firms.

Despite the government’s insistence that SOE reform will lead to a market-driven economy, outside observers remain skeptical that the country can succeed with this objective. One obstacle is the lack of transparent, commercially meaningful financial information about enterprise performance. Chinese accounting standards still deviate from international practices.

Meanwhile, SOEs are consuming three-fourths of domestic bank credit, crowding out investment by nonstate companies. Their demand for credit also undermines the viability of the weak, state-dominated banking system. The state’s efforts to convert these enterprises into commercially oriented entities are moving slowly. Its attempts to identify an enterprise’s investor are complicated by the fact that an entity can have multiple investors. This makes it hard to determine ownership when the state sells assets.

Private Property Developers

State-owned China Bond Insurance Co is expanding a program to help private property developers issue bonds in the face of declining home sales. It and the central bank-backed National Association of Financial Market Institutional Investors summoned 21 private builders to a meeting this week to discuss the next phase of the guarantee programme, which has helped developers such as Longfor Group Holding Ltd issue bonds worth more than 20 billion yuan since August.

Developers face significant bond repayment needs in 2024, as the principal amount of onshore and offshore debt due or puttable rises to 737.3 billion yuan, according to Fitch Ratings. Fitch expects non-defaulted property developers to continue deferring principal repayment via debt restructuring or default as they struggle with sluggish contracted sales and impaired access to capital markets.

Country Garden, the first developer to sell a bond under Beijing’s program, plans to issue another MTN this year to meet its onshore maturities in the second half of 2023. The developer said the next issue would be secured either by a guarantee from the Foshan municipal government or by posting its own assets as collateral, similar to the first issue.

Public Projects

More public property developers are issuing state-guaranteed bonds to ease liquidity woes. Since August, a total of 16 developers, including Longfor Group Holdings and Midea Real Estate, have issued bonds with the backing of China Bond Insurance.

Insurers with significant investment offerings, such as China Life Insurance and Ping An Insurance, have been encouraged to purchase bonds offloaded by retail investors owing to market turbulence and the easing of COVID-19 curbs, Bloomberg reported. These insurers have more than $1.3tn in assets under management.

As the bond market develops, supporting reforms and policy frameworks need to be strengthened to foster a mature market. These include enhancing market access, strengthening market liquidity and risk hedging, and simplifying legal and account- ing requirements. The successful implementation of these reforms requires determination and political capital. They are also critical for maintaining financial stability and economic development.

Navigate further to learn more