Research Publication: China’s Property Developers Struggle to Deleverage


31 Aug 2021

    HONG KONG, 31 August 2021. Pengyuan International has today published a research report “China’s Property Developers Struggle to Deleverage”.

    Property sales increased by 33% in the first seven months of 2021 on the back of a lower comparable base, also driven by the credit liquidity released during the coronavirus pandemic. In our view, the government’s overall policy stance is expected to remain tight for the rest of 2021 and 2022, especially in terms of property prices and credit controls. However, we believe the chance for more credit tightening is low as the government is striking a balance between the financial stability and deleveraging. We expect property sales growth to slow for the rest of 2021 with the full-year residential property sales growth to be at 15%.

    The growth of property development funding increased by 18% in the first seven months of 2021. Despite a double-digit growth of the total property development funding, the financing environment has been challenging for the developers, as property development loans decreased 5% in the first seven months. The funding structure has changed with more bank loans replaced by lower seniority funding sources, such as payables and minority interests. The lower seniority funding sources are likely to result in a shorter tenor and more market-driven financing for developers. This is likely to strain the liquidity of Chinese property developers, and widen credit differentiation among individual developers.

    We expect the leverage for Chinese property developers to reduce, while the liquidity condition remains tight. Although the cash to short term debt ratio of our sampled property developers has remained at a healthy level, the reliance on the other short-term financing channels has increased. In addition, bond maturity profile for the whole sector has been shortened. Percentage of shorter tenors of within one year has increased to 21% in the first half of 2021 from 4% in 2016 in the onshore property bond market. Such changes are more obvious within the property sector compared to the other sectors, highlighting the sector's difficulty in rolling over their debts for a longer duration with investors tending to avoid the exposure to longer-term risk.

    Year to date, net financing from property bond has declined sharply, in both the onshore and the offshore market. The onshore bond issuance had increased slightly, which was not enough to cover the maturities being almost doubled year on year in the first seven months of 2021. Offshore bond issuance declined 17% in the first seven months, in contrast to a 94% increase in the maturities in the first seven months of 2021. The refinancing pressure from bond is to ease in 2022, thanks to less maturities in the onshore market.  In the offshore market, USD59 billion property bonds are due to mature in 2022, representing an increase of 71% and 1% from 2020 and 2021, respectively. In the onshore market, there are RMB391 billion worth of bonds to mature in 2022, representing a decline of 39% and 46% from 2020 and 2021, respectively.

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    Primary Analyst
    Winnie Guo
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    winnie.guo@pyrating.com
    Secondary Analyst
    Brian Lam
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    brian.lam@pyrating.com
    Committee Chair
    Ke Chen, PhD
    +852 3615 8316
    ke.chen@pyrating.com
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    Charley Lui
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    charley.lui@pyrating.com
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    Allen Wei
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    allen.wei@pyrating.com
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