In 1H 2020, Chinese property developers’ offshore USD bond prices on the secondary market experienced a wave of fluctuations with some dropping dramatically (as low as 50 cents on the dollar) in March, while the bond prices of LGFVs (local government financing vehicle) were relatively steady.
Market speculation of such drop was partly due to the chase for USD liquidity in response to deteriorating investor confidence in the overall capital markets and hence the resulting bond fund redemptions.
Bond prices have gradually recovered since April with some of the bonds trading closer to par recently.
Total offshore USD bonds issuance amount by Chinese property developers recorded a year-on-year decrease of 8.2% to USD25,791 million in 1Q 2020, and continuously dropped to USD5,513 million in 2Q 2020, representing another year-on-year decrease of 74.8%.
The total issuance amount of Chinese LGFV offshore USD bonds also recorded about a 45.5% decrease to USD7.8 billion in the first half of 2020, compared with the first half of 2019. Since late March 2020, we have been witnessing a gradual thawing of the offshore USD bond market following the resumption of economic activities.
COVID-19 FUELS POLARISATION
The coronavirus outbreak at the beginning of 2020 has driven down the pace of contracted sales of Chinese property developers in China, which experienced a significant drop in the first two months of 2020 with year-on-year decrease of 35.9%.
Given the effective first phase control of the Covid-19 in China, monthly contracted sales performance has gradually recovered since late March 2020, showing a 14% increase in May 2020 when compared with the same period in 2019.
Some of the Chinese property developers’ contracted sales started to recover remarkably from the February slumped figures, while others are still trailing behind.
A divergence in sales performance is developing.
In some cases, the March contracted sales accounted for about 50% to 60% of 1Q 2020 contracted sales. Meanwhile, the April and May contracted sales figures continued painting a picture of recovery. We expect total contracted sales of China property developers to slightly decline in 2020 due to the repeating Covid-19 cases and still unstable operating environment.
Meanwhile, Chinese property developers are facing higher financing risk and tighter liquidity positions given the deteriorating cash collection from contracted sales. Cash collected from pre-sales proceeds accounted for 31.1% of total source of funding in the first five months of 2020, representing a decrease of 3.3 percentage points when compared with 2019.
On the other hand, cash generated from domestic loans increased to 17.1% of total source of funding in the first five months of 2020 from 14.1% in 2019.
We expect that large-to-medium property developers with good access to onshore funding will continue maintaining their moderate liquidity position as the onshore funding cost was lower than that of the offshore, but smaller developers may be exposed to refinancing pressure due to their weaker credit profile.
PROACTIVE POLICIES
China’s GDP contracted by 6.8% in 1Q 2020 compared with the same period last year.
The GDP plunge has driven the shift of policymakers’ priorities to ease monetary and fiscal policies. We foresee that the government will pursue greater public sector spending, particularly infrastructure investment, to underpin China’s economic growth in 2H 2020 and 2021 and LGFVs’ credit profiles, as infrastructure projects will be largely carried out by LGFVs.
We expect that China's GDP growth rate in 2020 will decline significantly but still remain positive. Provinces with weaker economic structures, such as the Northeast region, may record a lower GDP growth rate.
LGFVs located in these regions would encounter greater liquidity pressure as a result of their close relationships with their respective local governments in business and financial activities.
Chinese local governments generally face fiscal deficits with the ratios of budgetary revenue to budgetary expenditure (“the fiscal balance ratio”) falling in the range of 10% to 88% in 2019 for the 31 provinces.
The Chinese governments, particularly at the regional and local levels, would continue increasing debt financing in 2H 2020 due to greater fiscal pressure amid a slowing economy as well as expenditure for epidemic prevention and alleviation.
A more proactive fiscal policy will accelerate the increase in fiscal expenditure, while the economic slowdown will pressure the growth in tax revenue and regulatory controls on the real estate sector will weigh on the revenue from land sales.
LIANHE GLOBAL: A GIANT IN CHINA
Lianhe Ratings Global Limited (“Lianhe Global”) has rated US$11.4 billion of US dollar bonds, making it the largest China offshore credit rating agency. Meanwhile, Lianhe Global has assigned and published global scale issuer credit ratings (all solicited) to nineteen issuers.
As a homegrown international rating agency, Lianhe Global possesses unique local insight and understanding about the Chinese government framework and business environment in which Chinese issuers operate, enabling us to provide investors a different perspective from the big three US rating agencies. More than 70% of our current employees used to work for the international rating agencies in Asia for a substantial period of time.
Lianhe Global is a wholly-owned subsidiary of Lianhe Credit Information Service Co., Ltd. (“Lianhe Group”). Lianhe Group also owns China Lianhe Credit Rating Co., Ltd (“Lianhe Ratings”) which focuses on the Interbank Market and United Credit Ratings Co., Ltd. (“United Ratings”) which focuses on the exchange market in China. Together, we refer to them as Lianhe Capital Markets.
Lianhe Capital Markets is now one of the two largest credit rating agencies in China with more than 30% market share since its founding in 2000. As of December 2019, Lianhe Capital Markets had approximately 350 analysts covering a portfolio of 5,000 issuers ranging from corporates, LGFVs, and banks to structured finance products in China.
