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Trouble ahead for China's property market

By Patrick Higgins  |  01/02/2018 15:03
This article looks at fears over a continued borrowing frenzy in the Chinese real estate market

Some of the largest property developers in China have begun efforts to raise funds to refinance their debts, amidst continued fears that unsustainable development within the Chinese real estate market is reoccurring.
A number of China's largest residential and commercial property developers have begun conducting private placements, as well as issuing convertible bonds, with five arranged in January alone.  All of this is aimed at reducing debt to levels more sustainable to ensure continued property development operations. Much depends on this working out successfully as more than 75% of Chinese development companies have major bonds due to mature in 2018, highlighting the importance of raising further funds.  Such access to new funds is paramount for these firms, given the growth seen in their stock prices within the last year.  For instance, Country Garden, Evergrande, and Longfor have all seen their stock prices rise by 290, 370, and 150% respectively since 2016.   
Proportional moves towards liquidity or simply debt re-usage?
However, the reliance on the debt market for these companies has prompted concerns the bonds are simply Band-Aids to cover up problems while encouraging continued unrestricted growth.  The issuance of convertible bonds, by Country Garden and Evergrande especially, has raised tens of billions of dollars within the last month and this has raised concerns over the health of the Chinese real estate market.
Concerns in the future
There have been fears in recent years that Chinese companies have developed too much, too fast. There are concerns that there is not enough demand or financial ability in some cases to match all supply costs, leading to the inflating and bursting of successive bubbles.  For example, China experienced a mini bubble-burst just six years ago when property developers could not sell all the homes that they had built and thus were forced to conduct fire sales in order to pay off their debts.  Many companies, unable to do so without destroying their bottom line, went bankrupt.  Furthermore, with China's economy (despite the fake government economic data) no longer experiencing the booms in growth it once did, concerns are growing over the health of the Middle Kingdom’s property development market. The issuing of convertible bonds and other equity movements looks likely to provide enough short-term funding for Chinese developers. However, the continued focus on quantity over quality and the reluctance to cut back on development projects are causes for concern in the world's second-largest economy.

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