China's Solution To “Property Companies Facing Huge Debt Burdens”: Much More Debt
As reported earlier, China's stock market blasted higher overnight to the best level in seven months driven by the country's financial sector and especially its property developers. WSJ summarized the sudden buying frenzy: "as a slowdown hits China's real-estate market, investors are turning bullish and buying up stocks of large property developers on bets they will not only ride out the storm but also grow bigger. The MSCI China Real Estate Index has surged 16.5% since the start of July, on track for its best month in nearly three years, as local governments have started to ease housing purchase restrictions to boost sales."
Shares in some of the larger companies though have performed well with China Vanke Co., the country's biggest developer, up 22.7% this year and another large builder, Evergrande Real Estate Group Ltd. climbing 17.2%. This despite a warning by the same China Vanke two short months ago that the "Golden Era" For Chinese Housing Is Over.
However, aside from easing purchasing curbs which refute any stated government intentions to rein in the China's epic housing bubble following several months in which property prices and transactions tumbled, the real reason, as reported by Bloomberg: China’s government is once again authorizing developer debt sales for the first time in five years in a bid to avoid bankruptcies as the property market cools.
The pressure on Chinese real estate companies was underscored by the collapse in March of Zhejiang Xingrun Real Estate Co. Developers including China Vanke Co., the nation’s biggest, and Greentown China Holdings Ltd., the largest in the eastern province of Zhejiang, have cut property prices since then to boost sales. The slump comes as economic growth is set to cool to 7.4 percent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg.
So it was only logical that with China's attempt to normalize its epic credit bubble going horribly wrong, everything would be put on halt or rather, in reverse:
Jiangsu Future Land Co. a builder of homes in eastern China, sold 2 billion yuan ($323 million) of five-year AA rated bonds last week to yield 8.9 percent. That’s less than the average 9.73 percent on trust products that many developers relied on for financing after authorities stopped approving onshore note issuance in 2009.
The China Securities Regulatory Commission reversed course in April when it granted four real estate companies the right to sell the securities, after the collapse of a builder south of Shanghai the previous month underscored financing strains. The government allowed the first mortgage-backed debt sale since 2007 last week, in the latest step to ease restrictions on the industry as new home prices drop in a record number of cities.
“The issuances are obviously an easing signal,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “The CSRC will probably approve more note sales as long as developers have fund-raising demand. It would be helpful because bond costs are lower than trusts.”
The move to allow Chinese builders to tap the onshore note market, instead of raising funds from so-called shadow-banking products such as trusts or through international bonds, parallels the first regulatory approvals for new-stock sales in about four years. The CSRC said in March that Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. were allowed to sell yuan-denominated A shares in private placements.
Jiangsu Future Land said it will spend the proceeds from its bond sale to repay bank loans and replenish working capital, according to the prospectus. Tianjin Realty Development said it will use the money it raised to invest in a lower-cost housing project and repay borrowings.
But mostly it was to "extend and pretend" that the company is viable even as revenues tumble, and the only source of funding is, drumroll, debt.
In other words, China has figured out - yet again - what the Fed discovered back in 2009, namely why try to fix a problem created by ridiculous debt loads when one can just kick the can, and add even more debt?
As for the punchline:
“Property companies are facing huge debt burdens,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. “If the regulator hadn’t eased, there probably would have been more defaults.”
Or, translated: if the companies weren't allowed to "fix" their huge debt burdens with even more debt, it would have been a catastrophe.
Finally, here is why China is once again stuck injecting record amount of debt into its market:
“The revival of property bonds is the right move in the long run,” given real estate’s close ties to many industries including cement, steel and even banking, said Chen in Shanghai. “Property is the single most important sector to the Chinese economy.”
Indeed it is, with 75% of Chinese household wealth coming form the real estate sector (unlike in the US where this is flipped and it is all in the stock market and other financial assets). Which means that any hope that China would have done the right thing and burst the bubble in a controlled fashion are now gone forever. The only question is how much longer can the breakneck speed of bubble expansion in both housing and credit continue (something the Politburo was terrified of last summer) before everything collapses only this time the government will no longer be able to support the house of cards.
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