Remember the meme that China can’t have a financial crisis because it doesn’t borrow from foreigners? Except some Chinese do borrow heavily from foreigners, from the Yuan Takes Chinese Corporate Profits Down With It:
Tencent Holdings Ltd. TCEHY -0.24% said in August that foreign-exchange losses were the main reason for a sharp jump in financing costs to 354 million yuan in the second quarter, compared with net financing income of 14 million yuan a year earlier. The Internet conglomerate in April completed a $2.5 billion bond sale in the U.S. Tencent’s overall second-quarter profit rose 59% to 5.84 billion yuan. Tencent declined to comment for this article.
As of March 15, Chinese developers had issued 15 U.S. dollar bonds raising $7.1 billion so far this year, compared with 23 issues that raised $8.1 billion in the year-earlier period.
“That said, quite a number of developers have demonstrated the ability to access alternative markets, such as the offshore syndicated loan markets as another means of raising capital,” said Swee Ching Lim, Singapore-based credit analyst with Western Asset Management.
Cash-strapped Chinese developers are borrowing a record amount in the offshore loan market this year, adding to the highest debt loads since 2005.
Homebuilders in the world’s second-largest economy got $5.9 billion from foreign banks, up 39 percent from the same period last year, according to data compiled by Bloomberg. Builder debt has soared to 128 percent of equity, the highest since 2005, according to a Bloomberg Intelligence gauge of 84 companies.
……“Higher leverage on the balance sheet will give developers a higher financial burden,” said Agnes Wong, credit strategist at Nomura Holdings Inc. in Hong Kong. “That means that if presales are not going as quick as they expect it can translate into trouble more easily than before.”
Chinese property developers are increasingly raising funds through a method that some analysts say makes their debt loads look lighter than they are.
……Among their advantages to issuers, they can be treated on the balance sheet as equity, or a hybrid of equity and debt, rather than debt. That is because the payments are made at the discretion of the company, so they are considered dividends rather than interest payments.
……Among the developers, analysts highlighted Guangzhou-based developer Evergrande as relying most heavily on perpetual securities. Evergrande’s leverage would jump to 248% from 90% if the securities were classified as debt, Citi Research says.
Then back to the March 2014 article above:
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Beijing Capital was the first Hong Kong-listed developer to issue dollar senior perpetual capital securities last year, an equity-like security that does not dilute existing shareholders.
Higher debt levels, hidden debt, and growing exposure to currency risk at precisely the wrong time. Looks like some good candidates for a short-seller.
Authorities are seeking to head it off at the pass by making it easier for large developers to swallow their broke competitors by easing credit restrictions. From China Eases Credit Rules for Some Property Developers:
The biggest developers are the only ones likely to benefit from this credit loosening. China has more than 85,000 property developers, and authorities have been trying to streamline the number of companies as part of economic overhauls to make the economy less reliant on property investment for growth. Lenders have also refrained from offering loans or favorable terms to smaller developers. That puts larger developers in a position to snap up smaller ones if they run into difficulties. “For small developers, it might actually have little or few effects initially because the regulation states that it will apply only to a select few,” said one of the people.
And they’ll need to if this opinion piece from Ai Jingwei is right, forecasting difficulty for the real estate market, with improvement in the next one to two years unlikely. He is not pessimistic on September and October though, since strong sales and price cuts in the range of 15% to 30% will not break the big developers.
Even so, the blows keep coming. Ningxia is one of the poorer and less developed provinces in China, but this is still big news: on September 3, all 120 offices of Xinglin Real Estate suddenly closed. Home buyers who made down payments with the agency are wondering if they will get their money back:
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Ningxia Xinglin Real Estate Marketing Planning Co. in Yinchuan more than 120 stores on the 3rd suddenly all closed, Xing Lin Property Yinchuan Corporation also deserted. As the company fails to handle the purchase contract procedures, refund the purchase money and other reasons, at present, Yinchuan City Public Security Bureau has been receiving various buyers report.
On the 4th morning, reporters came to see Xing Lin Property Corporation Yinchuan, all staff have disappeared, office supplies scattered on the ground, a few pieces of work uniforms still hanging on a hanger, there have come to beg for paying back the principal buyers .
Buyers杨雪萍told reporters in June she came home buyers and real estate registration Xing Lin signed a purchase contract, and then in the process of loan procedures, Xing Lin estate staff asked her to put 136,000 yuan in down payment money hit the company accounts, and promised 45 working days of the agency good down payment procedures. But then the company has repeatedly delayed the time until the 3rd at noon, she again came to ask for the first payment, the staff go out to lunch to leave the grounds, then no audio.
According to Yinchuan City housing security management bureau chief intermediary thunderous introduction, since nearly three months, the company received complaints 120 times, mainly related to the collection of housing down payment is not timely refund and other issues. 3 pm Intermediary Management Division and found Hing Lun Property Yinchuan headquarters and more than 120 stores all closed, and the Xing Lin Nadu real estate property within the same legal entity more than 50 stores are all closed, the legal representative can not contact Wubing Lin on.
According to reports, Yinchuan City housing security bureau, although remind buyers pay attention to transaction security funds, the funds into a special account free financial supervision, but Xing Lin gullible buyers of real estate commitments, the money directly into the company’s unregulated account. According to buyers, said the amounts involved per person per household from a few million to hundreds of million dollars
And the lifting of buyer restrictions continues to fail. Of the cities that eased or eliminated buying restrictions, 62% have failed to respond. More price cuts are coming.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
