Top Chinese property developers recorded almost $3bn in foreign exchange losses, mainly on their US dollar borrowings, during the first half of the year as the renminbi weakened, adding pressure to their struggle to secure cash to service mounting debts.
The aggregate net foreign exchange losses for 24 of the top 30 mainland-listed Chinese developers by contracted sales before the Covid-19 crackdown in 2020 totalled Rmb21.25bn ($2.75bn) for the first six months of this year, according to research by Nikkei Asia.
The foreign exchange losses are on paper only and the actual loss or gain depends on the exchange rates of the respective due dates. But the figures act as a gauge of exchange rate risks involved with the foreign currency-denominated debts of distressed property developers, especially when the renminbi dipped to a 16-year low against the dollar on September 8.
Alicia García Herrero, chief Asia-Pacific economist at Natixis, views the renminbi depreciation as a result of increased liquidity due to cuts in reserve requirement ratios and interest rates by the People’s Bank of China, which is under stress from the real estate sector.
“Both, together with the now negative portfolio flows into China, have weakened the yuan,” she said. The weak currency is seen as a byproduct of assisting distressed developers, but it is apparently adding to the financial burden for those highly exposed to dollar debts.
While Yango Group was forced to delist from the Shenzhen exchange last month and Hong Kong-listed CIFI Holdings failed to announce its mid-year earnings report by the August 31 deadline, four companies did not explicitly disclose and a few said such losses are included in a wider category of “finance losses”. The actual losses by renminbi depreciation could be larger.
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China Evergrande topped the list with a net forex loss of Rmb4.14bn, or 12.5 per cent of the Rmb33bn net loss for the first six months. Among the Rmb625bn of total borrowings at the end of June, 26.3 per cent was denominated in US dollars and Hong Kong dollars. The value of the latter is pegged to the former.
Since the renminbi depreciated almost 10 per cent over the year until then, the value of Evergrande’s debts borrowed in the two foreign currencies are inflated when converted to the Chinese currency.
Country Garden reported more than Rmb3bn in net foreign exchange loss, contributing to a record half-year net loss of Rmb48.93bn. Global investors have been closely watching the Guangdong-based developer, as it initially missed a total of $22.5mn in interest payments to two of its dollar-denominated bonds last month.
Even though the company has recently been able to negotiate the redemption deadlines for certain domestic bonds — part of its Rmb257.9bn borrowings — management stated in its mid-year report that it is “facing more difficulties in obtaining financing through the issuance of new domestic corporate bonds and overseas senior notes due to the difficult and challenging debt financing environment”.
Sunac China, which has already defaulted on onshore and offshore bonds, said it has recorded a similar loss of Rmb3.24bn during the first half of the year. The Tianjin-based developer has not repaid Rm129.23bn, or more than 40 per cent of what it owes to creditors and bankers, as of the end of last month.
Cedric Lai, a Hong Kong-based analyst at Moody’s Investors Service, said this month that funding access for privately owned developers in general “will remain restricted amid damped market confidence” as he downgraded the overall credit outlook for China’s property sector to negative from stable.
Despite a slew of recent support measures, he expects a further decline in property sales nationwide as homebuyers’ concerns linger, especially as a negative credit development at Country Garden “has amplified their risk aversion”.
But a number of state-owned developers are less affected by the depreciation, as they are finding more domestic funding to stabilise their financials while diluting their foreign currency positions.
Li Xin, chair of China Resources Land, said the company had “actively reduced its non-[renminbi] net debt exposure” during the first half of the year. Foreign currency exposure at the end of June was 8.5 per cent of its total outstanding borrowings of Rmb231bn, down 8.3 percentage points from the end of 2022.
The company — a unit of China Resources, one of the 98 elite “central companies” under the direct control of Beijing — was able to issue six onshore bonds to raise Rmb10bn with coupon rates between 2.16 per cent and 3.39 per cent during the period. “[Renminbi] exchange rate fluctuations will not have a significant impact on the group’s financial status,” Li said.
The impact of the fluctuating dollar has been easing for Poly Developments, the largest listed developer by contracted sales and an entity connected to the People’s Liberations Army. Dollar-denominated bonds and short-term loans stood at slightly more than $1bn, down from $1.5bn a year ago.
Longfor, one of the few mainland private developers with investable corporate ratings from the three global agencies, is trying to manage currency fluctuation risks by hedging and gradually cutting back on debts denominated in US and Hong Kong dollars. The ratio of foreign currency-denominated borrowings is now 21.6 per cent, down 5.4 points from three years ago, with 97 per cent covered by rate swaps as of the end of June.
Despite the pessimistic outlook in the real estate sector, it is unlikely the central bank will take on much more risk subject to exchange rate fluctuations, analysts said.
“I believe US dollar-denominated debt from property developers is no longer a consideration for the PBoC in terms of currency,” Ju Wang, head of greater China forex and rates strategy at BNP Paribas, told Nikkei Asia.
“Even though the foreign exchange losses are quite large, the issue remaining is now only for a few distressed ones. Many others have been decreasing their positions or hedging their foreign currency exposures.”
A version of this article was first published by Nikkei Asia on September 18. ©2023 Nikkei Inc. All rights reserved.
