An oversupply of residential property and a market slowdown have left Chinese developers with their worst cash crunch in more than two years, revealing the extent of China's real estate downturn and paving the way for further consolidation.
A study of more than 80 China-listed developers that have declared March quarterly earnings showed cash to short-term-debt ratios at two-year lows amid a steady decline in margins since 2011.
That was the year the government moved to rein in the overheating housing market through measures including higher mortgage rates and limits on how many homes each family can buy.
But the government crackdown is only part of the story. A downturn in property prices, pressure to pay for last year's record land purchases, and a tighter credit market have combined to put severe strains on developers' liquidity.
The pressure could lead to sales of assets such as land banks and completed projects as the government presses for consolidation in the highly fragmented sector, analysts and investors said.
"The situation is quite severe now. Mid-sized developers are facing pressure as interest rates for trust loans are high, the impact will emerge eventually. The size of developers affected are getting larger," said Midland Realty chief operating officer Samuel Wong.
Caught between having to cut prices or raise capital, some developers are holding off for the moment, either using stop-gap measures or waiting for a bank rescue, say industry insiders.
"The market isn't favourable. We haven't decided whether to cut prices," said an official at unlisted Shenzhen-based developer Guang Group, one of China's top 100 developers.
The deterioration in developers' financials has been felt on two levels.
First, competition both for land banks and flat sales has squeezed margins. Margins on earnings before interest, taxes, depreciation, and amortisation are now in the low teens compared with nearly 20 per cent at one point in 2011.
The median cash to short-term debt ratio of the companies in the study has fallen to 0.77 from 1.11 at the end of 2012. A ratio below 1.0 is a red flag meaning cash is insufficient to cover debt coming due in a year.
London-based fund manager Yerlan Syzdykov at Pioneer Investments, which owns bonds in China property, said the deterioration in developers' financial positions was likely to trigger a long-overdue shake-up.
Volatile as the sector may be, few expect the market to suffer a collapse like the subprime mortgage crisis that hit the US.