Chinese Real Estate Firms Drowning in Debt

More than $40 billion issued in first half of 2019

A man works at a construction site of a residential skyscraper in Shanghai. JOHANNES EISELE/AFP/Getty Images

Amid the ups and downs of the U.S.-China trade war over the past year, the Chinese economy has been seriously declining.

China’s onshore real estate market has fallen drastically. Moreover, mainland real estate companies which relied on easy financing will soon face debt repayment for short term borrowings made in 2018 and 2019. As business prospects are increasingly gloomy and cash is harder to come by, various real estate firms have had no choice but to issue bonds overseas and use new debts to pay off old ones.

Chinese Real Estate Market Is Grim

On June 24, a report released by the Institute of Finance and Banking of the Chinese Academy of Social Sciences showed that Mainland China’s third- and fourth-tier cities have insufficient incentives for rising home prices. Some third- and fourth-tier cities experienced an initial surge in housing prices, but due to insufficient subsequent demand, prices could soon enter a downward trend. The local governments’ means of regulating real estate prices are also very limited.

Housing prices of core cities have also slowed down in May. Among them, the average home prices in first-tier cities rose 0.3 percent from the previous month, with the growth rate narrowing compared to the previous month. Real estate prices fell by 0.19 percent in Beijing and 0.12 percent in Guangzhou. Shanghai and Shenzhen home prices rose slightly, by 0.66 percent and 0.81 percent respectively, with Shenzhen’s growth rate being slightly higher than prior periods.

The second-tier cities of Chengdu, Xi'an, Qingdao, and Macau experienced significant declines in housing prices during the second half of 2018. In May 2019, Macau house prices rose by 1.12 percent, ranking first among second-tier cities. Wuhan housing prices fell by 1.02 percent, ranking last among the second-tier cities.

According to National Bureau of Statistics data released on June 18 on housing prices for 70 cities in May, the average price of existing homes rose by 0.43 percent in May, which was a significant drop from that of 0.53 percent in April.

Zhang Dawei, chief analyst at Zhongyuan Real Estate, believes that the price growth of existing homes is slowing, indicating that China’s property market is cooling off.

CCP Adds Fuel to the Fire

According to a report from China Real Estate News in May 2018, real estate company financing is becoming more and more constricted; last minute refinancing has become a last-ditch effort. As of May 22, real estate companies that have publicly announced plans to issue overseas bonds totaled 61, with a total issued value of over $24 billion, a significant increase of about 105 percent over the same period in 2017.

According to 21st Century Business Herald, overall debts of real estate enterprises have reached 6.8 trillion yuan ($990 billion) by 2019. More than 419 billion yuan ($61 billion) in accumulated credit will soon become due.

Adding fuel to the fire, in May 2018 the Chinese Communist Party (CCP) Development and Reform Commission and the Ministry of Finance jointly issued the “No. 706 [2018] of the National Development and Reform Commission” edict, which focuses on preventing foreign debts from becoming a source of local government liability, especially the offshore issuance of bonds by local governments through real estate enterprises.

On May 11, 2018, the National Development and Reform Commission revealed that more than ten companies, including leading domestic developers such as Sunac China, Vanke, Huayuan Real Estate, Dalian Wanda, and Capital Land have registered to issue offshore bonds.

As Chinese housing companies increasingly rely on offshore financing to alleviate lack of onshore credit, the CCP has sought to control the amount of foreign debt issued. Wang Chunying, director of the International Payments Department of the State Administration of Foreign Exchange, proposed that except for special situations, real estate enterprises and local government financing platforms may not borrow in foreign currency.

Real estate companies that violate such regulations are also constantly being exposed. According to China Real Estate News, Hengsheng Real Estate became the first real estate company to default on its debts in 2018, with Tianfang Group also subsequently defaulting on its debts.

Chinese Commentator Wen Xiaogang believes that Western investors do not know much about Chinese companies and tend to purchase their bonds due to their high yields. However, most Chinese companies do not have standardized operations, the property market is on the downswing, and housing companies increasingly need to refinance to pay off old loans. It is very likely that a bond will default.

As the wave of real estate debt defaults continues, experts worry that real estate will soon become a “grey rhinoceros,” a highly probable yet widely ignored event. A bond trader in Beijing said with the tightening of  real estate financing, a sharp decline in the cash flow growth of real estate enterprises, and the peak period of debt repayment yet to come, some housing companies are already at risk of default.

Chinese Real Estate Enterprises Issued Nearly $40 Billion in Overseas Debt in 1H19

According to Wind Data, the volume and scale of offshore bond issuance of mainland real estate enterprises have increased significantly in 2019 compared with the previous year.

From January to May, the average coupon rate was 8.9 percent, and total new financing was $35 billion. In June, more than 10 real estate enterprises issued more than $3 billion in offshore financing.

Furthermore, Wind Data shows that soon-to-expire debts of real estate companies from August to October 2019 will exceed 40 billion yuan ($5.8 billion).