MNI: Chinese Developer Defaults Loom Despite Property Support

Chinese property developers are at risk of defaulting on higher cost U.S. dollar bonds despite Beijing’s rescue package that includes easier funding to support the ailing property market, with debt restructuring plans needed to minimise losses for creditors, advisers told MNI.

Beijing’s package of 16 measures to stabilise the market comes as CNY181.2 billion of bonds issued by 200 key Chinese real estate companies mature this quarter, including CNY61.7 billion of foreign currency issuance, according to China Real Estate Information Corporation. CIFI Holdings Group and Zhongliang Holdings Group, once regarded as healthy survivors, said this month that they would suspend all principal and interest payments due on offshore financing.

Developers choose to default on U.S. dollar bonds as they often carry high interest rates and enjoy more favourable restructuring processes overseas, said Feng Ke, head of the Research Center of Financial and Industrial at Peking University. He believes the best choice for creditors is to negotiate a restructuring plan that includes rolling over maturing bonds and receiving some interest repayments.

Beijing’s new measures show regulators want to stabilise property financing across credit, bonds, trusts and asset management, said Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute. He said the new rules would correct excessive credit tightening and alleviate the prospect of a liquidity trap. (See MNI: PBOC Reactivates Policy Bank Lending Tool As Demand Lags)

Feng believes the new measures may stabilise the market 3-6 months earlier than his prior call for the market to stabilise in mid-2023, though it may be difficult to reverse offshore debt defaults. The clearing of weaker developers from the market will slow thanks to the new measures, he said.

“The fundamental way to solve the debt issue facing developers is a pickup in home sales which may come in Q2 next year at the earliest,” said Feng. Li agreed that a recovery in home sales, which account for about 50% of developers’ funding, was crucial but required prices to stop falling. (See MNI: China Home Buyers Wary Despite Rate Cuts - Analysts)

FINANCIAL RISKS

The new rules exempt banks and their managers from responsibility should new lending aimed at ensuring the delivery of homes turn into bad loans. Feng believes it will ease concerns among financiers and support developers with good track records but who are facing a short-term liquidity crunch.

“The priority for developers now is to ensure the delivery of unfinished housing projects,” Feng said. “Any government support would only tilt to developers with good credit records.”

The approach mirrors recent comments from People’s Bank of China Governor Yi Gang, who wrote that “self-rescue” should be the main method for resolving financial difficulties. This is a departure from past policy where the government stepped in to assist financially troubled HNA Group and Founder Group.

“This also means policymakers are confident the overall financial risk is under control with limited exposure from the real estate sector,” said Feng.

He calculated that developers account for about 10% of total bank credit assets, which are backed by collateral. The government would only step in should house and land prices drop an excessive 50-60% and threaten the value of collateral and residents’ assets, he said.

NO MAJOR STIMULUS

It’s unlikely there will be additional stimulus in first-tier cities given the government’s view that “housing is for living not speculation,” said Feng. However, moderate relaxation of home purchase restrictions in some districts of tier-one cities can still be expected, he said.

The 5-year Loan Prime Rate, which many lenders base their mortgages on, could be lowered by a total 25-50bp from 4.3% to help boost home sales, with a cut possible after the Central Economic Work Conference late December, said Feng.