Developers Face Sig. Financial Challenges In The Next Couple Of Months

“The traditional Chinese lunar calendar has a significant impact on debt payment and cash management for corporates and households because it is the long-held tradition in China to pay off all debts, including deferred wages, before the end of each lunar calendar year. The end of the current lunar year is 31 January ‘22. Of all types of debt, developers and their construction partners are especially under pressure for repaying deferred wages, because failing to do so could trigger social instability. There are about 52mn migrant workers with average annual pay at around CNY61K. Unlike other sectors, the construction sector pays a majority of migrant workers’ annual compensation right before the end of each lunar year. We estimate that about CNY1.0tn in deferred migrant construction workers’ wages might be at risk of delay, putting a lot of pressure on private developers and their construction partners in the coming month.”

• “Presale accounts for nearly 90% of new home sales and more than half of developers’ funding. To ensure developers have enough funds to complete their projects and deliver pre-sold homes, local governments have quite a lot of room to set up detailed rules on supervising developers’ presale funds in local escrow bank accounts. In view of the worsening financial situations of developers, local governments across China have recently tightened their grip on presale funds in fear of diversion to other regions for debt repayment. It’s like a prisoner’s dilemma: though each local government is rational in stepping up its monitoring of presale funds, the collective actions of local governments are equivalent to a credit crunch for the whole property sector.”
• “Chinese developers will face even higher repayment pressure in the coming two quarters in offshore bond markets. We estimate the amount of maturing offshore bonds issued by developers will almost double from USD10.2bn in Q421 to USD19.8bn in Q122 and USD18.5bn in Q222. For the onshore market, we estimate the amount of maturing bonds issued by developers may fall from CNY126bn in Q421 to CNY84bn in Q122 and CNY91bn in Q222, before jumping to CNY138bn in Q322. Assuming the USD/CNY remains at the current level of around CNY6.40, the total amount of maturing bonds (including both onshore and offshore) issued by developers will increase from CNY191bn in Q4 to CNY210bn in Q1 and CNY209bn in Q2.”