China Credit Contagion Turns Strong Developers Into Risky Bets

China Credit Tracker

Credit stress among China’s developers is spilling over to some of the nation’s stronger builders, leaving investors with even fewer places to hide.

Distress in the nation’s $870 billion offshore debt market remained elevated during February, Bloomberg’s China Credit Tracker shows. Returns on dollar bonds remain close to their lowest level in nearly two years. While the significantly larger onshore market showed signs of stabilizing, risks are magnifying as maturities on local bonds swell to 1 trillion yuan ($158 billion) this month.

Traders betting on better times ahead are in a difficult position, particularly amid risk-off sentiment in broader markets triggered by Russia’s invasion of Ukraine. Developers that once seemed shielded from the wild swings pummeling the market now look increasingly vulnerable. Dollar bonds of BB-rated firms like CIFI Holdings Group Co. and Sunac China Holdings Ltd. have seen steep declines.

There was also a painful reminder of how far and fast a firm can fall. Luxury property developer Shimao Group Holdings Ltd. was once considered a bellwether for China’s safer builders, but has been slashed deep into junk from investment grade in a matter of months. The firm has been cut to triple C territory by Moody’s Investors Service and Fitch Ratings. Logan Group Co., has also been downgraded on undisclosed debt and governance worries.

Spreading Slump

China's biggest developers are seeing home sales tumble this year

Note: Shows year-on-year drop in sales for first two months of 2022. Developers are listed in order of sales by value. Source: China Real Estate Information Corp., Bloomberg calculations

China’s property industry has been rocked by at least 14 defaults by developers since authorities began cracking down on excessive borrowing and speculation in the housing market in 2020. While policy makers are now signaling greater tolerance for selective relief by encouraging home buying in lower-tier cities, cutting mortgage rates and allowing more bank loans for developers, there are few signs this is helping boost sales.

While more adjustments are expected after the National People’s Congress taking place through this week, there are concerns of an “unstoppable downward spiral” according to Nomura International HK analysts. “We become increasingly worried whether the policy changes will be effective and timely enough to prevent property sales from a further correction” in the first half of this year, analysts Jizhou Dong and Stella Guo wrote in a note late February.

Dive into the methodology behind Bloomberg’s China Credit Tracker

Longer-term prospects for China’s largest builders look bleak. Home sales by some of these firms tumbled during the first two months of this year. China Vanke Co., the nation’s second-biggest developer by sales, saw a decline of 44%. At Country Garden Holdings Co., whose dollar bonds are at close to record lows, sales fell 24%. Even state-run China Overseas Land & Investment Ltd. saw them slump 48%.

Provincial Breakdown

Hebei ranks the first among all the provinces for onshore debt defaults

Note: Map shows Mainland China's onshore bond market. Figures are in billion yuan. Source: Bloomberg

Transparency worries are compounding the issue. Developers need to report their 2021 results by the end of March, which would provide the first look at the effect of Beijing’s campaign to deleverage the real estate sector. While concerns over hidden debt and refinancing risks are priced in for many weaker firms, stronger players are vulnerable to ‘sell first, ask questions later’ sentiment. Analysts expect delayed earning filings, more auditor resignations and further bad news in balance sheets.

Repayment Pressure

Monthly maturities for Chinese firms that could struggle to repay their debt

Note: Figures are in billion yuan. Source: Bloomberg

A wave of debt obligations in March—stressed Chinese developers face a $3.7 billion debt bill—is likely to spur fresh pressure with fund raising options still limited for many firms.

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