Chinese Builders’ Credit Profiles Worsening, Ratings Firms Warn

  • Fitch took 9 negative rating actions on the sector this year
  • S&P says recovery in China property market ‘rather fragile’

Credit rating companies are warning that the financial health of property developers in China is deteriorating even as the nation’s real estate market shows signs of recovery.

Fitch Ratings said Tuesday that a divergence in the performance of Chinese developers is driving more rating downgrades and outlook cuts in the industry, while S&P Global Ratings issued a report Monday saying that an aggressive expansion of land purchases for construction has led to weaker credit profiles for some builders. Moody’s Investors Service also reiterated Monday that the pace of Chinese home sales growth will likely moderate to a “single-digit percentage” in the 12 months through May 2017.

Property sales in China surged 61 percent in the first four months of 2016 compared with a year earlier, as the government cut interest rates and loosened home-buying rules to help stimulate the market and dissolve a glut of unsold homes in smaller cities. Despite this, among the 36 China property companies assessed by Fitch there were nine negative rating actions between Jan. 1 and May 15, and just three positive.

Exposure Risks

The credit assessor noted that some builders had large exposures to non-residential properties, including companies such as Dalian Wanda Commercial Properties Co., Greenland Holdings Corp., China South City Holdings Ltd. and Hydoo International Holding Ltd. as examples.

Another group of companies that Fitch took negative actions on lacked exposure to residential development properties in so-called higher-tier cities. It said that these kind of companies, including the likes of Country Garden Holdings Co. and Evergrande Real Estate Group Ltd., face pressures to acquire land in those urban areas that could push up leverage.

A recovery in the Chinese property market that’s been fueled by government stimulus may not be sustainable, according to S&P, which has cut ratings on 11 developers this year.

“The recovery isn’t all that rosy, in fact it’s rather fragile,” Cindy Huang, director of corporate ratings at S&P, said during a webcast on Monday. “It’s driven by liquidity.”

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