Real estate moguls with a Greece-size debt problem look for hints of relief, even as China’s legislature tries to wean industry off its loans
- Fifteen of the delegates at the ‘two session’s are developers, owning property companies with 2.44 trillion yuan (US$377 billion) of debt between them
- All but one of the 15 developers represented are in breach of one, if not all, of the Chinese central bank’s so-called Three Red Lines capital requirements
China’s political elite will face a number of political challenges when they gather in Beijing next month for the year’s biggest legislative set piece – the meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference, informally known as the “two sessions”. In this latest part of a series looking at the key items on the agenda, we examine the country’s military spending. You can read part one here.
China’s property developers, who replaced managers of decrepit state-owned factories as the nation’s largest debtors, will be in the hot seat when they show up next week at the Great Hall of the People for their annual legislative meeting in Beijing.
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“They have to present a doable solution at the two sessions, showing how they are going to reduce their debt and what their schedules are,” said Phillip Zhong, senior equity analyst at Morningstar.
“They need to give their word to the central government that they can get there at some point, and will not be the ones that bring systematic risk to the country’s economy, which is the biggest concern of Beijing right now.”
NPC and CPPCC delegates at the two sessions can recommend policies that may eventually be enacted into legislation. Being at the centre of China’s legislative process also give them front-row seats to see where government policies are headed. The tycoon delegates will look for clues of whether the central bank will maintain its tight cap on borrowings, and may even recommend policies that walk the tight rope between pleading for breathing space for their debt-fuelled industry, without causing the loans to blow out.
Jiangsu Zhongnan Construction Holdings, classified red according to the central bank with 78.1 billion yuan owed, was the only one of the 15 delegates that responded to queries by the Post.
Chen Jinshi, the Zhongnan chairman who also represents Jiangsu province at the NPC, is still preparing his proposals for the two sessions, according to an emailed response.
“Under the current circumstances, we will further improve the company’s turnover rate and further reduce our reliance on debts,” Zhongnan said.
But China’s real estate industry is mostly financed by borrowings, partly the result of a government effort to cap oversupply, which barred developers from selling homes off the plan. That turned the industry towards bank loans, bonds and any financial instrument that can fund their construction and land purchases.
“They should expect no mercy from top officials. They were selected to set examples to their peers, not to receive special treatment,” said Li Yujia, chief researcher at the Guangdong Property Policy Research Institute. “The government has made up its mind to completely change the heavy reliance on property and [is] unwilling to see money rushing back into it. The key message is loud and clear – China is geared up for boosting manufacturing and hi-tech industries, not selling homes. The [policy] stance could be reaffirmed more clearly at the two sessions.”
To forestall the implosion of the debt build-up and prevent any damage from blowing out China’s financial system at a time of slowing economic growth, the central bank slapped some of its most draconian credit curbs on developers since late last year.
With this one-two punch, the central bank must take extra care to avoid starving the property industry to death while they channel financial resources to other sectors, analysts said.
“The intention is the stable growth, not to kill the housing sector, which is still a key contributor to the economy,” said Moody’s Corporate Finance Group’s associate managing director Franco Leung. “Developers still get two to four years to comply with the deleveraging requirements. Large, but highly indebted developers have room and time to cut their debt through discount marketing, asset sales or equity fundraising.”
That exercise is already under way. Evergrande, with a third of the debt owed by the 15 developers, is typical of the shift.
Still, that did not stop the Shenzhen-based company from reporting a 20 per cent increase in its 2020 revenue to 723 billion yuan, giving Evergrande some breathing room on its 835.5 billion yuan of debt. Evergrande has set a target of selling 750 billion yuan of homes this year.
The fundraising plans were effective. Evergrande slashed its loans by 160 billion yuan as of January, two months ahead of schedule, and redeemed a HK$16.1 billion convertible bond before its February 10 deadline.
“We expect the company to at least improve its grade to orange, if not yellow, by end of the this year,” said CGS-CIMB Securities’ property analyst Raymond Cheng, who has kept an “add” recommendation on Evergrande shares since March 2018.
R&F has 9 billion yuan of debt due in the second quarter, with another 3 billion yuan due in the second half. It reported 36 billion yuan of cash at the end of September 2020, including 30 billion yuan set aside for normal operations, according to Fitch Ratings.
R&F’s chairman Zhang Li, who is a delegate to the economics section of the CPPCC, will need to improve the liquidity of his company, now classified red, said CreditSights’ senior analyst of Asian high-yield companies Cheong Yin Chin in Singapore.
“It still has a lot of onshore bonds and the cash held by the company is tight,” Cheong said. “The only good news is that many of its land parcels are in the Greater Bay Area, which are easier to sell. It just needs to sell more quickly.”
China’s central bank and financial regulators have already sounded the alarm, raised the red flag and put the most indebted developers on notice.
“Delegates running the big real estate companies will have to hand in some plans, but the government will never let the big ones default,” said Cheong. “Think about how many people will be out of jobs. As long as the government sees the big ones on track in cutting their debts, they can get some leeway.”