Fears mount over Chinese developers’ debt troubles

In a situation eerily reminiscent of the perfect storm that engulfed Irish property developers at the end of the boom, fears are growing over the astronomical debt exposure of developers in China, the world's second-largest economy, where house sales and prices are falling rapidly.

Cash-strapped Chinese developers are borrowing a record amount in the offshore loan market this year, adding to the highest debt loads since 2005. Homebuilders in the world’s most populous economy got $5.9 billion (€4.5 billion) from foreign banks, up 39 per cent on the same period last year, according to data compiled by Bloomberg.

Builder debt has soared to 128 per cent of equity, the highest since 2005, according to a gauge of 84 companies. New home prices fell in July in almost all cities the government tracks and developers are missing sales targets.

"Higher leverage on the balance sheet will give developers a higher financial burden," said Agnes Wong, credit strategist at Nomura Holdings Inc in Hong Kong. "That means that if presales are not going as quick as they expect it can translate into trouble more easily than before."

Premier Li Keqiang is allowing builders to expand financing channels in a bid to stem the slowdown in an economy that derived 16 per cent of its growth from property development last year, according to the World Bank.

China’s home sales fell 10.5 per cent in the first seven months of the year compared to the same period in 2013 to 3 trillion yuan (€371 billion), Moody’s Investors Service said in an August 29th report. New construction declined 20 per cent across the country, according to another report from Fitch Ratings.

Pressure on real estate companies was underscored by the collapse in March of Zhejiang Xingrun Real Estate. Developers including China Vanke, the nation's biggest, and Greentown China Holdings, the largest in the eastern province of Zhejiang, have cut prices since then to boost sales.

Slow growth

The slump comes as economic growth is set to cool to 7.4 per cent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg.

Standard and Poor’s has reduced ratings for six Chinese property companies and increased them for two this year. That compares with two upgrades and two downgrades last year.

Lenders in Asia are extending more credit to high-yield companies as they seek to increase returns as central banks in the US, Europe and Japan keep benchmark interest rates near zero.

Property sales may improve this year, helped by a rise in mortgage lending and selective loosening of purchases restrictions, Moody’s said in its August 29th report. The rise in loan funding is cause for concern because it reduces the claims that global bond investors have on the assets of Chinese developers, Wong said.