Property Defaults Seen as Financing Stresses Mount: China Credit
Yield premiums on Chinese real-estate bonds denominated in dollars have jumped 35 basis points this month to 582 basis points over Treasuries, the sharpest increase among emerging Asian countries, according to Bank of America Merrill Lynch indexes. That compares with a 19 basis-point advance for Indonesian builders. Moody’s Investors Service and Standard & Poor’s said some smaller Chinese developers may default in the second half amid falling sales and shrinking access to credit.
China’s real-estate industry poses the biggest near-term risk to growth in the world’s second-largest economy after new home prices dropped in the most cities in two years in June, according to JPMorgan Chase & Co. While government steps to ease property curbs helped builder bonds rally in July, they’re giving up those gains ahead of housing-price data due next week.
“The operating environment is still tough for Chinese developers,” said Franco Leung, a senior analyst in Hong Kong at Moody’s. “Banks in China have become more selective in lending to developers. Those weaker developers still face liquidity pressure.”
Closely held Zhejiang Xingrun Real Estate Co., located south of Shanghai, collapsed in March under 3.5 billion yuan ($569 million) of debt. Baoan Hongji Real Estate Group Co., a Shenzhen-based builder, said on July 14 its profit may have dropped as much as 96 percent in the first half from a year earlier.
“Given the fragmented nature of the property market in China and the sheer number of developers, it wouldn’t be surprising if there are news of developers being in financial difficulty or of outright defaults,” said Swee Ching Lim, a Singapore-based credit analyst at Western Asset Management Co.
Home prices fell in 55 of 70 cities in June from May, the National Bureau of Statistics said on July 18, the most since January 2011 when the government changed the way it compiles the data.
The inventory of unsold new homes in 20 large cities jumped to an average equivalent of more than 23 months of sales in June, according to Shenzhen World Union Properties Consultancy Inc. The floor space of unsold new apartments nationwide as of June 30 surged 25 percent from a year earlier, government data show.
“The whole Chinese property industry remains challenging because inventory is still high and some developers’ balance sheets are highly geared,” said Jacphanie Cheung, a research analyst in Hong Kong at Deutsche Bank AG. “Some property companies may disappoint the market when releasing interim results in August, and property bond supply may revive after results.”
The slump in builders’ offshore debt this month has erased most of the gains in July sparked by government steps to buoy the industry. The yield premium on Chinese property notes in dollars dropped 39 basis points last month.
Some Chinese cities, including Hohhot in the north and Jinan in the east, have started to relax property curbs to stimulate the market. The southeastern province of Fujian asked banks to speed up approvals for mortgage lending and increase loans to developers, according to a statement posted on Housing and Urban-Rural Development of Fujian’s website on Aug. 8.
Moody’s maintains a negative view on the industry even after some cities softened property curbs.
“The relaxing of restrictions has limited immediate impact,” Moody’s Leung said. It’s “confined to lower-tier cities. Investment demand there remains weak. Some cities’ inventory levels are still high.”
The cooling has also been felt among China’s larger developers.
Greenland Hong Kong Holdings Ltd. (337) said July 10 it may have a “material decline” in its consolidated income for the first half. The builder is a unit of state-owned Greenland Holding Group Co., the Shanghai city government-owned builder of one of China’s tallest towers.
China Overseas Grand Oceans Group Ltd. (81), a property development and sales company, said on July 11 that it may report a decline in net profit for the same period.
While corporate borrowing costs in China have fallen this year as authorities aim to pump more money into the economy to support growth, they remain higher than they were 12 months ago. The yield on AA- rated five-year corporate bonds has climbed 23 basis points in the past year to 6.91 percent. The rate on similar-maturity government securities is 3.98 percent, leaving the spread at 293 basis points.
“The overall credit environment is tight for smaller developers,” said Fu Bei, an analyst at S&P in Hong Kong. “Banks and trust companies have reduced their financial support for such companies given the rising risk.”
Concern defaults may spread has heightened as data indicate the government’s stimulus measures are failing to gain traction outside of manufacturing. China’s service industries stagnated in July as a private index fell to a record low.
Credit-default swaps insuring the nation’s debt against non-payment climbed 7 basis points this quarter to 84 basis points, according to prices from data provider CMA.
“Given the declining credit to small developers and the weaker home sales, there will continue to be defaults of smaller developers this year,” said S&P’s Fu. “We will see bigger differentiation among developers. On one hand, bigger developers will actively expand market share; on the other hand, smaller unlisted companies, which rely heavily on shadow banking borrowings, will find it more difficult to survive.”
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