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Wary of billion-dollar defaults, China does not want its daredevil real estate developers to take on any more debt.

Banks have been asked to limit their housing loan exposure, while developers that cross the so-called three red lines — a trio of leverage metrics Beijing watches — are forbidden from borrowing more.

Investors are clearly worried. China Fortune Land Development Co., a mid-sized developer, saw its dollar bonds tumble to record lows recently. How can home builders get out of their distress?

To improve their cash positions, developers can either divest assets or go on a sales blitz. Agile Group Holdings Ltd. just sold stakes in seven projects to Ping An Insurance Group Co. of China Ltd. for 7.1 billion Chinese yuan ($897 million). In an very unusual proposal, China Evergrande Group, Asia’s largest junk dollar bond issuer, has been offering 100% reimbursements over 10 years to those willing to cough up the full amount for some of its retail shops now.

But extraordinary times call for extraordinary measures. Developers, attuned to Beijing’s fast and furious credit cycles, are once again coming up with naughty if twisty ways to borrow and survive this harsh winter.

Beijing’s “three red lines” are based on balance sheet numbers. So an obvious way to circumvent regulatory scrutiny is to borrow through off-balance-sheet financing vehicles.

BB rated Agile did just that after crossing two of the red lines. Last June, Canford Mind Ltd., a shell company incorporated in the British Virgin Islands, issued a $175 million one-year 6.75% dollar bond “unconditionally and irrevocably guaranteed by” Agile, according to the offering document seen by Bloomberg Opinion.

But that $175 million debt is unlikely to show up on Agile’s balance sheet, because the guarantee “shall be enforceable other than on June 30 and Dec. 31 of each year,” the semiannual dates on which the company is supposed to provide snapshots of its balance sheet positions.

This means that China’s regulators, as well as Agile’s bond and equity holders, don’t get to assess the full risks of the company. In November, Agile privately raised another $250 million offered by Better Hai Investment Ltd., a Cayman Island-incorporated firm. Like the first, it was underwritten by Haitong Securities Co., whose onshore unit is under regulatory probe over suspected market manipulation on bond sales. Agile did not and is not required to make any public disclosure on the deal. Phone calls to the company were not returned, nor were emails to its investor relations personnel.

Agile is by no means an exception. Undisclosed, backroom private bond deals are becoming common. Since October, Yuzhou Group Holdings Co. and Ronshine China Holdings Ltd. have closed such deals, while Fantasia Holdings Group Co. and Logan Group Co. were marketing them to investors, reported Debtwire last month.

(On Jan. 14, Ronshine issued this response to the story: “As of today, all of Ronshine China Holdings Limited’s USD high-yield bonds are issued by the listing company and disclosed in its financial statements. The terms of private placements are basically consistent with our public offerings, and there is no special arrangement of guarantee on June 30 and Dec. 31.” Logan also released a statement that it has “not marketed any ‘undisclosed, backroom private bond deals’ as mentioned by Bloomberg and Debtwire in recent media reports nor did we receive an inquiry from the latter publication on the subject.”)

China’s real estate developers have a history of using off-balance-sheet vehicles to effectively skirt regulatory scrutiny. Take joint ventures for example. In 2019, 61% of developers rated by S&P Global Ratings derived at least 30% of their sales from unconsolidated joint ventures, double 2017 levels, the agency estimates. Beijing started its corporate deleveraging campaign in late 2017.

Joint ventures are convenient veils. As long as these partnerships are not consolidated, developers can pile up debt in them without having to report the financials. The amounts involved can be significant. Shimao Group Holdings Ltd., one of the few developers that do report such dealings, is expected to receive 35% to 40% of its sales from joint ventures over the next two years, estimates S&P.

No doubt, these off-balance-sheet borrowings are clever ways to avoid prying eyes. But the developers shouldn’t shoulder all the responsibility for questionable corporate governance. China’s entire $4 trillion corporate bond market is polluted — and the mindset starts at official levels. Last year, regional governments across China were transferring useless assets to the books of affiliated investment companies to lower their official debt-to-asset leverage ratios. This, in turn, allowed them to raise more money for infrastructure and other stimulus projects. What the developers are doing is not so different.

So here’s a word of caution for investors. Right now, everyone is worried about who’s crossing the “three red lines.” But don’t let your guard down when the dust seems to settle and developers appear to be in the safe zone again. There will be a lot of hidden debt lurking in the dark.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.

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