Chinese builders are getting perilously close to defaulting on bonds

Chinese developers are working hard to strengthen their land holdings, but the industry’s creditworthiness is paying the price.

The average probability that builders will renege on their obligations in the next year is 0.87 percent, according to the Bloomberg Default risk model. This is three times as high as in the technology industry, and roughly 75 percent of developers saw their default risk climb in the past year.

Chinese companies have focused on acquiring debt to increase their land holdings in the country’s property market, a strategy that had drawn the support of stock investors for large companies like China Evergrande Group and China Vanke. But this support is now waning as the economic growth in China slows and policymakers launch a financial deleveraging campaign.

China Vanke recently made a move to sell floating-rate notes in dollars, but other companies have not been as creative. Wuzhou International Holdings defaulted on debts this month, while Zhonghong Holding Co. said Wednesday that is has overdue borrowing of 3.5 billion yuan. Zhonghong also defaulted on more than $174 million in debt earlier this year.

Overall, Chinese builders need to pay back $96 billion (or 625 billion yuan) worth of bonds domestically and internationally through 2019. Paul Lukaszewski of Aberdeen Standard Investments told Bloomberg he expects delinquencies to increase going forward.

“The Chinese corporations which have financed themselves on a shorter-term basis are increasingly at risk of stumbling into potential defaults,” he said. [Bloomberg] – Eddie Small