TOKYO (BLOOMBERG) – China Evergrande group faces another key bond payment deadline on Saturday (November 6), part of more than US $ 2 billion (S $ 2.7 billion) to come this month here to stressed Chinese real estate developers while the industry slump persists.
Major builders saw home sales drop 32% last month from a year earlier, according to property research firm China Real Estate Information Corp (CRIC). This could exacerbate a liquidity shortage as the government seeks to reduce leverage in the real estate sector and debt refinancing becomes increasingly difficult.
Evergrande’s unit, Scenery Journey, has $ 82.5 million in coupons on two-dollar bonds maturing Saturday. Last week, Evergrande bondholders received an overdue interest payment shortly before a grace period expired, giving the indebted company more time to raise funds through the sale of assets.
A surge in Chinese unwanted dollar bond yields last month made it nearly impossible for stressed developers to roll over their maturing debt. At least four carmakers defaulted last month as the country’s credit market suffers its biggest upheaval in years.
Yet the banking system has so far managed to overcome the slump in the real estate sector. China’s largest state-owned banks extended their profit recovery into the third quarter, fueled by rising credit demand and improving asset quality, results released last week showed.
Developer Yango Group is seeking to extend three of its dollar bills because “existing internal resources may be insufficient,” according to a file. The Shanghai-based builder, the country’s 18th largest in terms of contract sales, intends to improve liquidity and avoid defaults, he said.
The company’s shares fell 8.4% on Monday in Shenzhen, hitting a seven-year low. Chinese dollar high-yield bonds fell for an eighth consecutive day Monday after falling nearly nine cents to the dollar last month, ending the worst two-month drop in a decade.
New home sales by area in the nation’s top 100 developers fell 32% last month from a year earlier, a CRIC report revealed on Monday. Sales increased 1.4 percent from the previous month.
The outlook for the real estate market does not look bright and sales could continue to slow towards the end of the year, according to the CRIC report. Redsun Properties Group bought back a dollar bond that matured on Saturday, according to a stock exchange document.
The note had $ 83 million in circulation following recent buybacks, Redsun previously said. Redsun has an additional $ 1.9 billion in dollar bonds outstanding, with the next due in April, according to data compiled by Bloomberg.
Chinese financial markets were mostly unfazed after Beijing decided to expand property tax trials by imposing levies on some homeowners. While details remain elusive, analyst consensus indicates limited immediate impact on the market beyond real estate sectors.
The trials are expected to last five years, paving the way for eventual nationwide deployment. Although the taxes are “untimely” and can exacerbate negative sentiment towards developer stocks, there is little additional drag on sectors that are already facing headwinds, according to Mr. Cheng Wee Tan, senior equity analyst. Singapore based at Morningstar.
Chinese developers in debt are struggling to comply with Beijing’s stricter funding rules. Two-thirds of China’s top 30 real estate companies by CRIC-ranked sales violated at least one of the measures known as the “three red lines,” according to data compiled by Bloomberg as of Oct. 29.
China’s largest state-owned banks extended their profit recovery into the third quarter, fueled by rising demand for credit and improving asset quality. The Industrial and Commercial Bank of China said on Friday that its net profit rose 11%. The Bank of China, Agricultural Bank of China and Construction Bank of China posted gains of 13-16%.
Still, risks emerge as turmoil mounts in the country’s sprawling real estate market. Chinese banks held more than 51.4 trillion yuan ($ 8 trillion) in outstanding loans to the real estate sector in September, an increase of 7.6% from the previous year. The exposure was more than any other industry and accounted for about 27% of the country’s total lending, according to official data.
Overall, around 41% of the assets of the Chinese banking system were directly or indirectly associated with the real estate sector at the end of last year, and any decline in real estate prices could have an impact on the quality of assets in due to higher default rates in related industries and a lower collateral value, according to Citigroup.