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Strong sales mean yuan depreciation is not a problem for Chinese developers with foreign debts, Moody's says

By Zhang Shidong

/ SCMP |

October 8, 2019 7:00 AM SGT

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Most Chinese property developers could withstand anything up to a 10 per cent depreciation in the yuan, because resilient sales will offset the cost of foreign debts, according to Moody's Investors Service.

While home sales improved in the past two months in mainland China, not many developers were issuing bonds because of tighter regulatory scrutiny, according to the rating agency.

The offshore Chinese yuan has weakened 3.7 per cent against the US dollar so far this year, the second-worst performer in Asia, as the trade war and a slowdown in growth drag it down.

"The developers' strong revenue and earnings over the next 12 to 18 months will provide a buffer against the negative effect of a depreciation of the [yuan] against the US dollar, while the portion of debt denominated in [yuan] also remains far larger than foreign currency debt," said Danny Chan, an analyst at Moody's.

Property sales increased 11 per cent from a year earlier in August, accelerating from an 8 per cent gain in the previous month, according to Moody's.

New house prices rose in 55 out of 70 Chinese cities tracked in August, and the number of cities that registered price increases was the lowest in 18 months, according to the National Bureau of Statistics. Home prices rose by an average 0.58 per cent, the 52nd consecutive month of gains, it said.

Policymakers have put in place tightening measures to cool rising real-estate prices in China, with restrictions on the number of houses someone can buy and heightened scrutiny of loans advanced to developers and homebuyers. The People's Bank of China has also refrained from cutting the interest rate to avert an asset bubble, even as global central banks unleash a new round of lowering borrowing costs.

Offshore bond sales by Chinese developers amounted to US$3 billion last month, below the average level for the first seven months of the year, and onshore debt issuance almost halved from a month earlier to US$694 million, according to Moody's.

A gauge of 124 developers trading on the Shanghai and Shenzhen stock exchanges has risen 13 per cent this year, according to data provider Shanghai DZH. That trails the 16 per cent gain on the benchmark Shanghai Composite Index. The developers trade at an average of 10.4 times earnings, compared with the multiple of 14.2 times for the benchmark gauge.

"Should property sales remain sluggish going forward, pressure from the policy front will probably be eased," said Chen Tiancheng, an analyst at Tianfeng Securities. "We expect second-half earnings for developers to exceed expectations and a loose macro-environment will help boost the valuation expansion of the sector."

Moody's expects growth in home sales to slow for the rest of the year, because of a high base for the same period in 2018 and difficult financing conditions and policy headwinds.

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