More troubling news today about China’s real estate bust from the FT:
The growth in Asia’s bond market has been driven in large part by Chinese issuers, whether in US dollars or local Asian currencies. Up to half of all issuance year-to-date has been from Chinese companies, leading Morgan Stanley to note “Asia is evolving into a China-centric investment grade credit market”.…Now there may be worse to come. “The prospect of tighter credit conditions represents increasing downside risks to the highly China-sensitive Asia high-yield class,” Morgan Stanley analysts add.
…Many property developers went offshore to raise money because of strict rules in China about how land acquisition and development can be financed. Banks are not allowed to finance land acquisition. That has led developers to the shadow market or offshore…Then add in the currency mismatch. Until February, few people worried that the revenues of Chinese property developers were all in renminbi, because the renminbi was strengthening against the dollar and against a basket of trade-weighted currencies…But in the last week of February the People’s Bank of China suddenly reversed course. The redback is now down against the dollar, partly reversing a 30 per cent rise in the preceding years…Because this development was so unexpected, bankers say almost no Chinese property developers hedged their foreign currency debt.
That’s another pro-cyclical feedback loop built into the Chinese property machine and another avenue of contagion into the regional economy if the Chinese property sector turns unruly, although the bond market is not yet large enough to destabilising more widely.
