Local authority debts also a concern as trends point towards deepening of mainland economic slowdown
Bloomberg 29 September 2011
Beijing’s clampdown on property loans and concerns that local authorities will struggle to repay their debts are driving up corporate borrowing costs by the most in four years relative to government bonds.
The difference between yields on 10-year notes issued by top-rated companies and government securities widened 46 basis points this quarter to 221 points. A gap of 224 on September 26 was the biggest since at least March 2006, according to data from debt clearing house Chinabond.
The spread between similar-maturity United States corporate notes and Treasuries expanded by 32 to 85, based on Bank of America Merrill Lynch and Bloomberg indexes.
Rising borrowing costs may deepen a slowdown in the world’s second-biggest economy as a faltering US recovery and Europe’s debt crisis dim the outlook for exports. The mainland is counting on expansion to repay debt from a two-year, 4 trillion yuan (HK$4.8 trillion) spending binge that helped sustain growth amid the global financial crisis. Standard & Poor’s predicts property prices will drop 10 per cent in 2011.
“Almost all sectors have started to see signs of a slowdown, which usually are accompanied by shrinking profit margins and rising bad loan probabilities,” said Ju Wang, a fixed-income strategist at Barclays Capital. “A cooling property market and rising difficulties for local governments to secure financing are the most worrying signs.”
Guangzhou R&F Properties cut its 2011 sales target by 20 per cent to 32 billion yuan, the Hong Kong Economic Journal reported yesterday. S&P lowered its credit-rating outlook for Hopson Development Holdings to “negative” from “stable” on September 22 and released a report yesterday saying developers face an “increasingly severe” outlook in obtaining financing.
The International Monetary Fund last week trimmed its 2011 forecast for mainland economic growth to 9.5 per cent from a June estimate of 9.6 per cent, citing tighter monetary conditions and moderating external demand. The Washington-based lender’s 2012 projection was cut to 9 per cent from 9.5 per cent. Property construction is a mainstay of fixed-asset investment, which accounted for more than 50 per cent of last year’s 10.4 per cent gain in gross domestic product, official data show.
“Risks of an economic slowdown are increasing in China,” said Hu Hangyu, a bond analyst in Beijing at Citic Securities, the nation’s second-biggest brokerage by revenue. “If the government expands curbs on the property market, those real- estate companies that are running out of money will likely default.” Hu said he did not recommend buying corporate bonds rated lower than AAA, S&P’s highest grade.
The People’s Bank of China has raised interest rates five times over the past year, curbed lending to property developers and increased down payments for home loans as part of Premier Wen Jiabao’s campaign to prevent a property bubble. The government has also limited purchases of housing in cities such as Beijing and Shanghai where price gains were deemed excessive.
Land prices in Beijing slumped 76 per cent in August from a month earlier, while Guangzhou land prices dived 53 per cent, according to Soufun Holdings, the country’s biggest property website. Land auction failures surged 242 per cent in the first seven months of this year because of government curbs on the property market, the Beijing Times reported on August 3.
Waning demand may make it more difficult for some of the thousands of companies set up by local governments to service debts taken on to fund infrastructure investment. China Real Estate Information Corporation, a Shanghai-based property information and consulting firm, estimates 40 per cent of overall local government revenue came from land sales last year.
An official audit released in June showed regional authorities’ financing units had 10.7 trillion yuan of liabilities at the end of last year and S&P estimated in April that as much as 30 per cent of loans to the entities may go bad.
In a sign some of the units are struggling, the auditor of Liaoning province estimated in July that about 85 per cent of such companies in its region had insufficient income in 2010 to cover all their debt servicing payments.
The average yield on the mainland’s top-rated 10-year corporate debt increased 49 basis points, or 0.49 percentage points, this quarter to 6.13 per cent yesterday, Chinabond figures show.
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Brakes on property boom impact borrowing costs
Local authority debts also a concern as trends point towards deepening of mainland economic slowdown
Bloomberg
29 September 2011
Beijing’s clampdown on property loans and concerns that local authorities will struggle to repay their debts are driving up corporate borrowing costs by the most in four years relative to government bonds.
The difference between yields on 10-year notes issued by top-rated companies and government securities widened 46 basis points this quarter to 221 points. A gap of 224 on September 26 was the biggest since at least March 2006, according to data from debt clearing house Chinabond.
The spread between similar-maturity United States corporate notes and Treasuries expanded by 32 to 85, based on Bank of America Merrill Lynch and Bloomberg indexes.
Rising borrowing costs may deepen a slowdown in the world’s second-biggest economy as a faltering US recovery and Europe’s debt crisis dim the outlook for exports. The mainland is counting on expansion to repay debt from a two-year, 4 trillion yuan (HK$4.8 trillion) spending binge that helped sustain growth amid the global financial crisis. Standard & Poor’s predicts property prices will drop 10 per cent in 2011.
“Almost all sectors have started to see signs of a slowdown, which usually are accompanied by shrinking profit margins and rising bad loan probabilities,” said Ju Wang, a fixed-income strategist at Barclays Capital. “A cooling property market and rising difficulties for local governments to secure financing are the most worrying signs.”
Guangzhou R&F Properties cut its 2011 sales target by 20 per cent to 32 billion yuan, the Hong Kong Economic Journal reported yesterday. S&P lowered its credit-rating outlook for Hopson Development Holdings to “negative” from “stable” on September 22 and released a report yesterday saying developers face an “increasingly severe” outlook in obtaining financing.
The International Monetary Fund last week trimmed its 2011 forecast for mainland economic growth to 9.5 per cent from a June estimate of 9.6 per cent, citing tighter monetary conditions and moderating external demand. The Washington-based lender’s 2012 projection was cut to 9 per cent from 9.5 per cent. Property construction is a mainstay of fixed-asset investment, which accounted for more than 50 per cent of last year’s 10.4 per cent gain in gross domestic product, official data show.
“Risks of an economic slowdown are increasing in China,” said Hu Hangyu, a bond analyst in Beijing at Citic Securities, the nation’s second-biggest brokerage by revenue. “If the government expands curbs on the property market, those real- estate companies that are running out of money will likely default.” Hu said he did not recommend buying corporate bonds rated lower than AAA, S&P’s highest grade.
The People’s Bank of China has raised interest rates five times over the past year, curbed lending to property developers and increased down payments for home loans as part of Premier Wen Jiabao’s campaign to prevent a property bubble. The government has also limited purchases of housing in cities such as Beijing and Shanghai where price gains were deemed excessive.
Land prices in Beijing slumped 76 per cent in August from a month earlier, while Guangzhou land prices dived 53 per cent, according to Soufun Holdings, the country’s biggest property website. Land auction failures surged 242 per cent in the first seven months of this year because of government curbs on the property market, the Beijing Times reported on August 3.
Waning demand may make it more difficult for some of the thousands of companies set up by local governments to service debts taken on to fund infrastructure investment. China Real Estate Information Corporation, a Shanghai-based property information and consulting firm, estimates 40 per cent of overall local government revenue came from land sales last year.
An official audit released in June showed regional authorities’ financing units had 10.7 trillion yuan of liabilities at the end of last year and S&P estimated in April that as much as 30 per cent of loans to the entities may go bad.
In a sign some of the units are struggling, the auditor of Liaoning province estimated in July that about 85 per cent of such companies in its region had insufficient income in 2010 to cover all their debt servicing payments.
The average yield on the mainland’s top-rated 10-year corporate debt increased 49 basis points, or 0.49 percentage points, this quarter to 6.13 per cent yesterday, Chinabond figures show.
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