Chinese property developers squeezed by weaker yuan, rising cost of overseas debt
Many Chinese developers turned to foreign markets to raise working capital earlier this year when regulators introduced a slew of measures to limit borrowing at home.
Now, the sharp depreciation of the yuan is threatening to derail that funding lifeline by making it far more costly to service debt denominated in US dollars.
This will potentially force some home builders to sell down inventory at distressed prices in the coming months, according to analysts.
We will definitely see developers sell some of their projects at a lower price just to raise cash as fast as possible
The decline in the yuan, now down almost 10 per cent from its recent highs against the US dollar, means that the overseas funding channel no longer makes sense, especially if it continues to devalue.
“Offshore fundraising will be tougher for developers,” said Shen Jianguang, chief economist at JD Finance. “If they do not have income from overseas operations, the continuous depreciation of the yuan means a higher financing cost since the bonds are in US dollars.”
The offshore yuan traded at a 15-month low of 6.8824 per US dollar on Friday morning, extending a 0.8 per cent decline on Thursday. It staged a sudden surprise rally later that day after the central bank announced a change to the rules aimed at making it far more expensive for traders to short-sell the currency.
By lunchtime on Monday the offshore yuan was trading at 6.8290 against the greenback, still down about 10 per cent from its peak in March.