Chinese property developers squeezed by weaker yuan, rising cost of overseas debt
August 14, 2018 Category China News Round-up, Weekly
The sharp depreciation of the Chinese currency threatens to derail an important source of funding for Chinese property developers, potentially forcing some home builders to sell down inventory at distressed prices in the coming months, according to analysts. Many developers turned to overseas funding markets to raise working capital in the first half of the year after measures by Chinese regulators to tighten credit. The sharp decline in the yuan means that this 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 U.S. dollars.” Currency experts forecast the yuan will continue to soften throughout the year, further squeezing developers who are struggling to service U.S. debt.
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. “We will definitely see developers sell some of their projects at a lower price just to raise cash as fast as possible,” said Shao Yu, Chief Economist at Oriental Securities. 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% of the market while the top 20 will account for more than half, according to Zhu Haibin, Chief China Economist at JPMorgan.
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