CHINA’S riskiest borrowers are ramping up sales of short-term dollar debt again, reigniting speculation the authorities will clamp down on what has become a way to raise cash under the radar.

Beijing’s deleveraging drive — endorsed by President Xi Jinping and the Politburo in April — has inadvertently fueled a boom in short-end notes this year. As the National Development and Reform Commission (NDRC) started withholding approvals for offshore debt issuance by property developers and local government financing vehicles, companies got resourceful, selling debt due in one year or less as that doesn’t require permission from the authorities.

Such short-term notes only started to appear in 2017, and after spiking to around $3 billion in June and July, sales tailed off in August amid the summer lull and as the NDRC approved some longer-term debt. Issuance started to climb again in September.

“I expect the NDRC will try to stop it,” said  Owen Gallimore, head of credit strategy in Singapore at Australia & New Zealand Banking Group Ltd. Given a lot of these companies have yuan revenue streams, “issuers that have default records onshore or are facing challenges funding in the domestic market would pose risks to investors and themselves as they don’t have the offshore dollars to repay once the money is used,” he said.

After building up debt levels in the wake of the global financial crisis, China is trying to tackle its leverage problem with regulators clamping down on bank lending and using money-market rates and bureaucratic roadblocks to discourage corporate borrowing, especially by lower-rated firms. What started out as a funding shortcut favored by property developers has expanded to other companies, with six issuers selling $726 million of short-term bonds so far this month, data compiled by Bloomberg show.

Three calls to the NDRC’s department in charge of dealing with foreign media inquiries went unanswered Tuesday. A spokesman for the body, China’s top economic planning agency, said in July that it was working with other government departments on measures to cut company leverage.

In 2017, 17 companies have priced a total of $4.3 billion of debt due in less than a year, with most of those issuers either unrated by credit ratings agencies or in the single B space, meaning they are rated as riskier credits. Four bankers who have been involved in these short-term issues but don’t want to be quoted on potential deals said demand was still strong and they expected more sales — especially given the concern over a potential crackdown.

The NDRC is likely to start looking more closely at which companies are allowed to issue debt offshore given this sort of fundraising is impacting overall credit quality, said Jini Lee, a partner at Hong Kong law firm Ashurst LLP who predicted officials may act to curb this issuance back in June.

“The NDRC is quite careful at looking at leverage levels, financial statements, ratings and default risks,” she said. “They’d like the whole process to be quite controlled.”

While very short-term debt seems a good quick fix, issuers have to start preparing to refinance them within six to seven months of selling the bonds, putting them at risk of higher costs, Lee said.

The market will see a redemption wave mid next year as these bonds — which typically range in maturity from 360 to 364 days — come due. In June, $1.8 billion of the notes mature, followed by another $1.1 billion in July, according to data compiled by Bloomberg.

Developer Greenland Holdings Corp. — whose unit in the province of Liaoning defaulted on onshore debt in August — has sold bonds due in less than a year in 2017 along with HNA Group Co., the Chinese conglomerate that’s said to be facing short-term financing issues.

Joining them last week was Tianjin Lingang Investment Holding Co., a Chinese local port developer which priced $260 million of 360-day bonds and SDG Finance Ltd., a subsidiary of Shandong Gold Financial Holdings Group Hong Kong Co — it issued $200 million of 365-day notes.

Neither Tianjin Lingang or SDG Finance’s debt are rated, with international agencies typically not assigning credit ratings to such short-term bonds. That limits the investor pool to mostly private banks and wealth investors as institutions tend to avoid unrated securities, according to Ashurst’s Lee.

The NDRC may issue new parameters for regulating foreign-currency debt, including notes due in less than a year, local media reported in June citing unidentified market players. But even if the authorities do start cracking down, that could pose its own problems, says Chaksum Lau, a credit investment manager at Dongxing Securities (HK) Asset Management Co. in Hong Kong.

“If the NDRC really shuts down this funding avenue, when these short term bonds mature there will be a greater refinancing risks,” he said. — Bloomberg