Weakening yuan piles pressure on highly indebted Chinese property developers

By Pearl Liu pearl.liu@scmp.com / https://www.scmp.com/business/article/3025256/weakening-yuan-piles-pressure-highly-indebted-chinese-property-developers?utm_medium=partner&utm_campaign=contentexchange&utm_source=EdgeProp | September 11, 2019 11:57 AM SGT
Chinese builders " already struggling with a stagnant housing market and several rounds of tightening credit control measures " now have to deal with a falling yuan amid increasing offshore debt.
The yuan weakened by 3.84 per cent in August, the biggest monthly loss since January 1994. It also broke through the key level of 7 yuan per US dollar, after US President Donald Trump announced that he would slap import tariffs of 15 per cent on an additional tranche of goods that will ultimately cover a further US$300 billion of Chinese goods exported to the US later this year.
According to ratings agency Moody's Investors Service, foreign currency debt now accounts for a quarter of Chinese developers' total debt, up from 20 per cent at the end of June 2018. Besides, builders are also finding it difficult to the tap the offshore debt market because of the additional curbs.
"The developers generate nearly all of their revenue in renminbi, and many do not hedge their foreign-currency debt against exchange rate movements. As a result, renminbi depreciation causes their foreign-currency debt and related interest expenses to rise in renminbi terms, and subsequently weakens their leverage and interest coverage," Moody's said.
The deteriorating conditions have taken a toll on Chinese builders.
As of July, the number of developers filing for bankruptcy had risen to 274, a jump of 50 per cent from a year ago, according to the website of the People's Court Daily, a state-owned publication.
Not only that. Nine out of the 10 top builders on the mainland have reported a surge in their debts as seen from their first-half earnings statements. They reported a higher net gearing ratio (net debt over total equity) " which shows the company's ability to repay loans.
The pack was led by billionaire Xu Jiayin's China Evergrande, which had 813 billion yuan (US$113.6 billion) in outstanding loans, according to the company's latest interim results.
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