Why China’s Developers Have So Much Dollar Debt

Chinese real estate firms long prospered by selling a lot of dollar-denominated debt. This year hasn’t been as kind: Their dollar bonds have lost about one-third of their value amid concerns about a liquidity crisis at one of the biggest: China Evergrande Group. Worries about possible spillover or contagion have extended to other distressed developers, many of whom struggle to repay existing bonds if they cannot borrow more, such that defaults become almost inevitable. That has even the U.S. Federal Reserve worried about potential risks to global markets and growth.

Developers had $207 billion in dollar-denominated bonds outstanding, accounting for about one-quarter of the total from China, according to Bloomberg-compiled data as of Oct. 25. The country’s biggest such borrower by amount outstanding is Evergrande at $19.2 billion. Most dollar debt sold by Chinese builders is considered high yield or junk rated, meaning it’s below investment grade. Such ratings usually reflect a higher risk of the borrower not being able to repay the debt on time. But such bonds have long been favored by global investors hungry for juicy returns in a world where a lot of safer alternatives are negative-yielding. One of Evergrande’s dollar bonds, an 8.75% note due 2025, was once one of the world’s most widely traded notes.