Nearly 300 Chinese property developers go bankrupt this year amid liquidity crunch

Chinese authorities have been tightening financing rules for real estate developers to curb risks in the sector and prevent the housing market from overheating. That has added to pressure on cash-starved developers and brings many of them, especially small-sized ones, to bankruptcy.

As of July 23, 271 property developers had declared bankruptcy this year and in July alone, 34 developers have declared bankruptcy, equivalent to an average of 1.48 bankruptcy case each day, according to the record on the website of the people’s court.

“While the number of bankruptcy cases is still lower than 2014 when about 2000 developers went broke, the trend is worth special attention, which indicates rising concerns about the sector’s lack of access to financing,” said Zhang Dawei, chief analyst at the Centaline Property.

Most of the developers are small-sized companies based in China’s tier-three and tier-four cities, which are more vulnerable to tightening liquidity conditions compared to large developers which can secure funding at a cost lower than 5 per cent, although the list also include Yinyi Group in Zhejiang Province, which is one of the top 500 companies in China.

Chinese regulators have rolled out 15 policies to tighten financing to homebuilder this year and more small developers are expected to leave the sector as more pressure piles on, said Zhang.

The regulators suspended some developers from issuing onshore bond and asset-backed securities, introduced additional restrictions on their offshore bond sales and stepped up scrutiny on trust companies’ lending to developers. It’s reported that the authority will launch an inspections on 75 banking institutions in 30 cities in a move to tighten scrutiny on their property loans, including home mortgage loans.

“Since the second quarter, we clearly feel property policies are tightening. Right now, my main work is to look for financing and we can accept borrowing cost as high as 10 per cent,” said an executive at a Guangzhou-based developers.

“Some developers’ borrowing cost has surged above 15 per cent and most financial institutions are unable to provide financing to them if their leverage is too high,” said a senior executive at a leading property developer.”

“We have limited quota for loans for real estate development and a high requirement for developers’ qualifications,” said a customer manager at China Merchants Bank. “Generally speaking, only the top 30 developers can get loans from our bank.”

The spread between the borrowing cost for large developers and small developers. On July 9th,  China Overseas Land & Investment Ltd issued 2 billion yuan 5.5-year nots at a coupon of 2.9 per cent, the lowest level for the sector on record. Its offshore US dollar bonds were issued at a coupon of 3.45 per cent, also the lowest for Chinese developers. Three day later, Jiayuan International recently issued $225 million US dollar bonds at a coupon of 13.75 per cent.

Some developers have started to take measures to deal with the downturn. For example, Vanke has provided aggressive discounts to accelerate home sales and cash collections, to prepare enough case for the coming winter, while others such as China Evergrande are taking strides to expand into other business such as new energy vehicle manufacturing.

Some developers are seeking an overseas IPO to raise funds. Since January 2019, eight mainland developers and two property management companies have applied for listings in Hong Kong. So far, only two have been approved by the exchange and the other eight are still under review.

In addition, asset sale is another way for them to get funding. As of July 22, there are 44 real estate projects put on sales. In particular, 32 sales plan were disclosed after mid-May, an average of one projects every two days.