ANALYSIS: China’s Property Developers to Face Repayment Pressure in 2024

Residential buildings in Huaian, in China's eastern Jiangsu Province, on Nov. 16, 2022. STR/AFP via Getty Images

News analysis

Persistent property woes will continue to be the biggest drag on China’s property developers next year, posing a key problem for the world’s second-largest economy as builders struggle for cash and property buyers hesitate to spend, unsure if the depressed real estate sector can recover.

“Chinese property developers will continue to face significant bond repayments in 2024, as the principal amount of onshore and offshore bonds due or puttable next year will hit 737.3 billion yuan ($103.17 billion) in total, up 11.3 percent from the 2023 maturities of 662.5 billion yuan of those with principal payment needs in 2024,” according to Fitch Ratings in a note viewed by The Epoch Times on Dec. 26, adding that the nationwide contracted property sales could drop by as much as 5 percent next year.

The collapse of China’s decades-long property bubble has eroded investor and consumer confidence, while major Chinese property developers have failed or filed for bankruptcy this year, and government efforts to stabilize the real estate market have had little impact.

Last week, for instance, real estate developer China Aoyuan Group sought protection from lawsuits by filing for Chapter 15 bankruptcy in a U.S. court while it plans to reorganize its debts.

Earlier this month, China South City Holdings announced that due to its cash flow struggles caused by the property crisis sweeping the nation, the operator of commercial and logistical facilities will be unable to make specific bond interest payments that were due in November.

Aoyuan also joins a growing list of Chinese real estate developers—including China Evergrande Group and Sunac China Holdings—applying for bankruptcy protection in the United States.

“We expect many privately owned developers [that have not defaulted yet] to continue to face repayment challenges, and some may defer repayment via debt restructuring or even default,” the Fitch note reads.

The risk analyst firm estimates that 16 developers are scheduled to make 10.9 billion yuan (about $1.5 billion) of principal repayment via installments in 2024, up from their 2023 level of 8.5 billion yuan (about $1.2 billion).

“This is mainly due to sluggish contracted sales amid widespread buyer concerns over the delivery and quality of homes, impaired capital-market funding access, and the need to prioritise project construction,” the note reads.

New home sales in China are predicted to suffer their first consecutive yearly decreases this year due to low consumer confidence and the country’s fragile property market.

According to China’s National Bureau of Statistics data released mid-December, new home sales fell 7.3 percent by area from January to November, witnessing the sixth straight drop in new apartment prices.

Moot Point

According to Fitch, private developers who have managed to stay afloat “will need to repay a total principal amount of CNY39.3 billion and USD5.5 billion in the onshore and offshore bond markets, respectively, next year, exceeding their 2023 amounts of CNY34.6 billion and USD3.9 billion, respectively.” Furthermore, maturities will peak in March and August 2024, totaling more than 10 billion yuan (about $1.4 billion).

Hence, many believe that the fundamental question for the Chinese economy in 2024 will be whether the depressed real estate industry, which accounts for more than a quarter of the economy, will once again drag the economy down.

Despite Beijing’s monetary easing and stimulus measures over the past few months to overcome the property downturn and the weak confidence following China’s post-COVID-19 reopening, persistent property weakness continues to weigh on monetary policy transmission, which could continue to hurt the economy.

The People’s Bank of China slashed the benchmark lending rates (the reverse repo rate) and policy rates twice this year, while in October, Beijing launched a 1-trillion yuan (about $140 billion) sovereign debt issue to encourage local governments to spend on infrastructure and disaster recovery.

Bloomberg reported last month that Chinese officials were planning to lend an additional 1 trillion yuan in low-cost central bank borrowing to policy banks in stages to support projects centered on affordable housing and urban village revitalization.

“We find that the economic impact of monetary easing has declined meaningfully post-Covid due to smaller monetary policy shocks and weaker monetary policy transmission efficiency. The three years of zero-Covid policy (ZCP), the unprecedented property downturn and some sector-level regulatory tightening have led to significant frictions to the transmission,” according to a recent Goldman Sachs research report viewed by The Epoch Times.

The global research firm also said that although some “frictions” (for example, COVID policy-related) have subsided due to China’s openings and policy relaxation, others may persist in the medium- to long-term, necessitating more structural reforms to ease transfer.

No Simple Solution

Still, while there may be a temporary uptick in mood due to analysts’ expectations of more government assistance in 2024 to stem the tide, there is no easy fix.

“For 2024, we believe more policy support is underway to prevent the spilling over of contagion risk to other sectors and the overall economy, which could give a short boost to market sentiment, but remain skeptical as to its effectiveness unless the concerns of home buyers (financial insecurity and weak home price expectations) are alleviated,” writes Patrick Pan, analyst at Daiwa Capital Markets, in a research note released early this month.

That aside, Mr. Pan thinks that privately owned property developers will continue to face a challenging operating environment in their sluggish home sales and financing activities, which suggests that property investors prefer to stick with major state-owned developers for the longer term.

Nonetheless, Fitch believes that, while defaulted developers’ ability to service capital-market debt will likely remain limited in the near term, some of them that have pledged to make installments after extending the maturities of their onshore bonds may provide bondholders with small cash recoveries.

According to Dealing Matrix, Country Garden and its onshore operational subsidiary, for example, repaid 2 percent of the principal of four extended onshore notes in November. CIFI Group also recently paid 2 percent of the deferred principal of an onshore bond.