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.
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.