China Insight: Refinancing Pressure on Property Developers Mounts

It is still too early to say whether the COVID-19 outbreak will be effectively contained by the end of Q1. However, it’s quite certain that Chinese property developers will not see a significant recovery in sales over the rest of this quarter.

In the USD bond market, Chinese IG property names saw credit spread tightening after PBOC made a huge liquidity injection and lowered reverse repo rates as soon as the extended LNY holiday was over. As far as Chinese HY property names are concerned, we saw their short-dated papers well absorbed by the market as soon as they were launched in the primary market. All these seems to suggest the developers' balance sheets are barely impacted by the sharp decline of sales. However, if we look at their refinancing schedule more closely, we may doubt such a resilience will be sustained (chart 1).

Taking a look at chart 2 and chart 3, we note that unlike onshore CNY issuance, the offshore USD debt issuance from Chinese property developers far exceeded redemptions in January on the back of a huge issuance of short-term papers. We attribute this behaviour to the property developers’ awareness of a potential surge of liquidity stress when the whole country is fighting with COVID-19.

As per Chart 4, Chinese property developers will have as much as CNY60bn of bonds (45% onshore, 55% offshore) maturing in March. They (especially those highly geared), currently faced with liquidity stress, may see a significant rise in their financing costs next month. That in turn may impact the secondary market sentiment negatively.

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