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Business trends

S&P warns on default risk for weak China developers

Home prices forecast to slide further in 2019, even as builders' debt costs rise

Residential apartment blocks under construction in Beijing.   © Reuters

HONG KONG -- China's big property developers appear to face a long slump ahead, with credit rating agency S&P Global Ratings predicting a further slide in housing prices during the coming year amid tight credit and a slowing economy.

As sales in lower-tier cities lose steam, S&P forecasts a decrease of up to 5% in home prices for 2019 as well as declines of 3% to 7% in residential property transaction volume, according to a report issued on Wednesday.

In particular, analysts noted bigger default risks for smaller developers owing to the higher cost of rolling over debt as interest rates climb. But China Evergrande Group and Ronshine China Holdings -- both among the country's top 20 developers -- are also said to have "less than adequate" liquidity levels, according to the report.

"Refinancing remains the biggest challenge for developers in 2019," said Cindy Huang, senior corporate ratings director at S&P Global Ratings. While the People's Bank of China last month pumped $110 billion into the economy by lowering the amount of cash that commercial banks have to put aside as reserves, Huang said the extra liquidity has not benefited private developers in terms of borrowing costs.

Last month, Evergrande surprised the bond market by selling debt at interest rates of up to 13.75%. Its billionaire chairman Xu Jiayin subscribed to more than half of the $1.8 billion bond issue, a move seen as an attempt to lift investor confidence.

The bond sale by the country's third-largest developer could set a "new normal" for other developers when they raise debt capital, an analyst says.

"We think the issuance of Evergrande's subsidiary Hengda did set a new benchmark for developers with similar ratings and fundamentals," Matthew Chow, an analyst at S&P Global Ratings, wrote in an email to the Nikkei Asian Review, though he added that some less-well-known property groups had already issued bonds at yields of over 10% in the previous mounts.

Evergrande also appears to have absorbed "quite a bit of demand" in the bond market, he said, which could leave less appetite for subsequent issuers and drive up their financing costs. "The supply is going to be high," Chow said.

A total of $47 billion in loans for S&P-rated Chinese property companies will come due by 2019.

In addition, the yuan's weakness against the dollar makes paying back offshore loans harder for developers. S&P estimates 35% of developers it rated have more than 30% of their total debts settled in foreign currencies.

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