China's property developers' default risk poses funding threat

The risk that more mainland property developers will default after the collapse of Zhejiang Xingrun Real Estate will make it harder for them to raise funds just as home sales cool, Moody's Investors Service said.

The builders have issued US$500 million of offshore yuan or US dollar bonds this month, compared with US$1.6 billion in the same period last year and a record US$9.2 billion in the first quarter, data compiled by Moody's show. The price of property securities, which account for 32 per cent of a Bank of America Merrill Lynch index of China dollar bonds, slumped 4.9 per cent in the past year, paring their returns to 0.9 per cent. That compares with a 1.6 per cent total gain for US dollar bonds globally, according to Bank of America.

"Investors are concerned certain developers will go into more defaults," said Franco Leung, an analyst at Moody's, predicting a drop in developers' offshore debt issuance in the coming six months. "While China's economy is slowing, there will be stress on companies with weaker credit profiles."

The world's second-largest economy expanded 7.4 per cent in the first three months, the weakest pace in six quarters.

Property sales in the first quarter fell 5.2 per cent from a year earlier and the floor space of new property construction dropped 25.2 per cent, statistics bureau data showed on April 16.

Samson Lee, head of debt capital markets at BOC International, a unit of Bank of China in Hong Kong, said investors were still interested in property bonds, even though they have become more selective after the collapse of Zhejiang Xingrun. "Some good names still can issue bonds," Lee said. "But it will be difficult for some lower-rated companies to sell."