Weakening yuan piles pressure on highly indebted Chinese property developers
- The yuan, which has depreciated by 3.84 per cent in August, is bound to hurt mainland developers that have US$19.3 billion of offshore debt maturing in the 12 months to July 2020
- Foreign currency debt now accounts for 25 per cent of Chinese developers’ total debt, up from 20 per cent at the end of June 2018, according to Moody’s
Chinese builders – already struggling with a stagnant housing market and several rounds of tightening credit control measures – now have to deal with a falling yuan amid increasing offshore debt.
The yuan weakened by 3.84 per cent in August, the biggest monthly loss since January 1994. It also broke through the key level of 7 yuan per US dollar, after US President Donald Trump announced that he would slap import tariffs of 15 per cent on an additional tranche of goods that will ultimately cover a further US$300 billion of Chinese goods exported to the US later this year.
“The developers generate nearly all of their revenue in renminbi, and many do not hedge their foreign-currency debt against exchange rate movements. As a result, renminbi depreciation causes their foreign-currency debt and related interest expenses to rise in renminbi terms, and subsequently weakens their leverage and interest coverage,” Moody’s said.
The deteriorating conditions have taken a toll on Chinese builders.
As of July, the number of developers filing for bankruptcy had risen to 274, a jump of 50 per cent from a year ago, according to the website of the People’s Court Daily, a state-owned publication.
Bankruptcies among Chinese developers are up by a half amid slowing economy
Not only that. Nine out of the 10 top builders on the mainland have reported a surge in their debts as seen from their first-half earnings statements. They reported a higher net gearing ratio (net debt over total equity) – which shows the company’s ability to repay loans.
The pack was led by billionaire Xu Jiayin’s China Evergrande, which had 813 billion yuan (US$113.6 billion) in outstanding loans, according to the company’s latest interim results.
Evergrande’s vice-president Xia Haijun vowed in 2018 to cut the company’s net gearing ratio to 100 per cent by the end of 2019 and to 70 per cent by 2020. Yet, in the first six months of 2019, the ratio had risen to 152.1 per cent.
According to a Moody’s report issued in July, an estimated US$19.3 billion of offshore bonds held by Chinese developers will mature or become puttable in the 12 months to July 2020, but it believes that the impact of a depreciating yuan on debt repayments would be manageable.
Chinese home builders ‘hunger’ for offshore bond markets after land spending binge prompts government clampdown on credit
“Most of the rated high-yield Chinese developers will continue to recognise strong revenue and earnings over the next 12-18 months, which will provide them with a buffer against the negative impact of about 10 per cent depreciation of the Chinese yuan,” said Kaven Tsang, senior vice-president with Moody’s.
However, industry observers believe that China’s housing market had reached its peak last year at 15 trillion yuan. And for some the era of booming profits could be over.
