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.
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.
Currency experts forecast the yuan will continue to soften throughout the year, further squeezing developers who are struggling to service US debt.
Shao Yu, chief economist with Oriental Securities, said mainland companies will think twice before returning to the US debt markets now that currency risk has become more prevalent.
“We will see a decline of developers’ offshore financing in the coming months as compared to the boom in the first half,” Shao told the South China Morning Post on the sidelines of the Boao Real Estate Forum on Friday.
Beijing’s clampdown on the shadow banking sector, in addition to other measures designed to tighten domestic credit, spurred many property developers to raise funds overseas this past year.
“We basically do one to two offshore bond issuances every week, and a majority of the issuers are real estate companies this year,” said Zhao Ju, executive vice-president of China Merchants Bank.
In July, Agile Property Holdings issued US$400 million in three-year senior notes. In June, Future Land Development Holdings issued US$200 million in senior notes, while China Aoyuan Property Group issued US$225 million of senior notes. Other developers that have issued US dollar denominated debt since December include Times China Holdings, Sunac China Holding and China Fortune Land Development.
“We will definitely see developers sell some of their projects at a lower price just to raise cash as fast as possible,” Shao said.
Smaller developers may have to sell some projects to larger rivals, or in a worst-case scenario, they may be swallowed up by bigger developers.
By 2020 the top eight property developers will account for more than 35 per cent of the market while the top 20 will account for more than half, according to Zhu Haibin, chief China economist at JPMorgan.