A wall of onshore debt worth tens of billions of dollars issued by Chinese property developers is due to mature next year, sparking concerns over defaults at a time of economic slowdown and tightening liquidity.
China’s property market is a bedrock for growth and economists fear that signs of distress in developer debt would send ripples through the financial system just as other problems are mounting.
China’s economy is already under pressure, as a trade war with the US threatens to hurt manufacturing across a wide range of industries. Rising levels of debt and ambitious banking reforms have also led to concerns over instability in China’s financial sector.
At Rmb385bn ($55bn), the onshore local-currency debt burden for 2019, which includes asset-backed securities, is now almost four times the size of Chinese developers’ offshore US dollar borrowing of about $14.5bn coming due in 2019, according to data from Dealogic.
Although international investors are typically exposed to the sector through offshore credit markets, analysts have increasingly flagged onshore debt as the key challenge for developers as China’s growth slows to a decade low.
“For 2019, the real concern is onshore [debt],” said Alaa Bushehri, head of emerging markets corporate debt at BNP Paribas Asset Management. “The US dollar debt gets a lot of attention, but we are focusing on renminbi debt.”
Real estate investment slowed in September, a sign that developers are increasingly uncertain about the future. Homeowners recently took to the streets in several large cities to demand refunds after developers cut prices to stimulate sales.
Property developers have struggled to issue new debt and refinance maturing bonds this year as the Chinese government attempts to control the runaway credit-fuelled growth that has helped power the sector in recent years.
Ms Bushehri noted that just 2 per cent of renminbi debt issuance this year has come from developers, a marked decrease on past years.
While Beijing has recently accelerated approvals to enable companies to tap the markets for refinancing, smaller developers face more difficulty winning clearance and attracting buyers.
Hui Ka Yan, China’s third-richest man and chairman of Chinese property group Evergrande, attracted attention last week after putting up $1bn of his own money to buy his company’s $1.8bn bond, an attempt to prop up the deal in a dwindling market.
In past years, property developers were often able to access credit through China’s shadow banking industry, the Rmb62.9tn ($9tn) market for off-balance-sheet debt channelled from banks and trust companies, among other financial institutions, according to Andrew Collier, managing director at Orient Capital Research. But a crackdown on shadow banking has made companies much more reliant on the public capital markets.
“The property developers are capital intensive and are facing difficulties with a slowing domestic market,” Mr Collier said. “All these headwinds will make it more difficult for them to finance their existing and future obligations.”
Translated by Vanessa