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China's property woes could be worse than feared: Analysis

·4-min read
Aerial scene of Hong Kong
All eyes are on China as it grapples with a potential property crisis. (Source: Getty)

Two-thirds of China’s largest developers have breached debt restrictions, new analysis has found, as another major developer acts to skirt default.

The analysis by Bloomberg found that of the 30 largest Chinese property firms, two-thirds failed to meet at least one of the country’s three new debt rules.

President Xi Jinping introduced the ‘three red lines’ rules in August 2020 to begin deleveraging the Chinese property market, and funnel more economic energy into emerging sectors.

The three rules dictate:

  • A property firm’s liabilities shouldn’t be worth more than 70 per cent of its assets

  • Equity should be larger than net debt

  • Cash should be at least equal to short-term borrowings

The embattled China Evergrande has broken two of those red lines, as has China Railway Construction Corporation.

But other groups, like Greenland Holdings Corp., Guangzhou R&F Properties Co. and Jiangsu Zhongnan Construction Group, have breached all three rules.

Yango moves to fend off default

The Bloomberg analysis came as Chinese developer Yango Group on Monday revealed it was acting to avoid default.

The company told the Hong Kong stock exchange it would offer US$25 in cash and US$1,000 in new notes for every US$1,000 in existing bonds exchanged.

The offer applies to US dollar notes due January and March 2022 and February 2023.

Yango said worsening consumer sentiment and tighter government policy had pushed it to act, as refinancing avenues were cut off.

Now, it warns, it is facing “enormous pressure on our short-term liquidity".

The offer is part of the group’s plan to “avoid imminent payment defaults and potential holistic restructurings of our debts and business operations”.

The Shenzhen Stock Exchange marked a 7.5 per cent slide in Yango shares on Monday, with the price now down nearly a quarter in the space of a week.

Fitch Ratings downgraded Yango to B- on Thursday, with a negative outlook.

“The downgrade reflects Yango's weakened access to funding, increasing liquidity pressure due to large, short-term, capital-market instrument maturities, and diminishing financial flexibility to keep a stable business profile,” the ratings agency said.

“The Negative Outlook reflects Fitch's view of the uncertainty over Yango's liquidity and the stability of the company's sales proceeds amid a market slowdown.”

China in the spotlight

China’s purchasing managers’ index (PMI) fell 0.9 percentage points to 50.8 in October, while its manufacturing PMI fell further to 49.2, new data released on Sunday revealed.

A manufacturing PMI below 50 indicates a shrinking of the country’s manufacturing economy.

Global ratings agency S&P predicts defaults will rise as Chinese companies hit greater refinancing risks amid a longer down cycle.

“In the most severe scenario, the liquidity of as much as one-third of rated Chinese developers will come under pressure. The entities most at risk are overwhelmingly rated B- to B+,” S&P said in a late-October report.

“Over 50 per cent of our rated portfolio of Chinese developers falls into this ratings category.”

Teetering developer Evergrande also continues to shadow the country’s economy, as it battles to manage US$300 billion in debt.

The huge developer is now the world’s most indebted company, but has managed to pay off two payments in the nick of time - just avoiding a collapse that could have sent the rest of the Chinese property sector into freefall.

Federal Treasurer Josh Frydenberg has warned that as China’s economy slows, Australia faces “downside risks”.

"Coal supply constraints saw price spikes, energy rationing in some provinces and a slowdown in industrial production," he told the Australian Financial Review.

"Chinese government limits on steel production have also contributed to lower levels of activity."

For Australia, it means demand for iron ore is also slowing.

“With China’s property sector responsible for consuming half of China’s steel production it has already impacted the price for iron ore, seeing it come down from over $US200 ($266) a tonne earlier in the year to around $US100 ($133) a tonne today,” Frydenberg said.

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