Asset Freeze Measures on Evergrande Group by China Guangfa Bank on the 19th
Issues in Real Estate Developers Increase Likelihood of Additional Monetary Easing
"Growth Stocks Have Greater Potential for Gains"
[Asia Economy Reporter Gong Byung-sun] The financial structures of real estate development companies in China are deteriorating day by day. Although the volatility of bond prices for Chinese real estate developers is expected to increase in the second half of the year, the risk spreading throughout the entire system is considered low. On the contrary, experts agree that this situation could generate momentum for further rises in Chinese growth stocks.
On the 19th, China Guangfa Bank received a court order to freeze assets worth 130 million yuan (approximately 23.123 billion KRW) of Hengda Group, a major Chinese real estate developer. Although the loan maturity date is next March, Guangfa Bank's swift action has heightened market concerns about Hengda Group's financial condition. On the same day, the Housing Construction Department of Shaoyang City, Hunan Province, China, issued a ban on the sale of two apartment complexes under Hengda Group until October 13. Consequently, Hengda Group's stock price and bond prices, listed on the Hong Kong Stock Exchange, plunged by 26% and 25%, respectively, between the 19th and 21st.
The reason for the instability in the financial structures of Chinese real estate developers is due to government regulations. Since August last year, the Chinese government has introduced various regulations on the debt of real estate developers and commercial banks' real estate loans, worsening the financing conditions for these developers. Choi Seol-hwa, a researcher at Meritz Securities, explained, "Among the regulations, the three red lines for debt management likely reduced the liquidity of real estate developers who had been rapidly growing based on high leverage." The three red lines include ▲ asset-liability ratio excluding advance payments below 70%, ▲ net debt ratio below 100%, and ▲ cash ratio (cash ratio/short-term debt) exceeding 1x.
In fact, the financing composition of Chinese real estate developers has changed according to policies this year. As of the first half of this year, the proportion of bank loans and self-financing dropped from 47% last year to 42%, while the share of advance payments from pre-sales and individual mortgage loans increased from 47% to 54%. Researcher Choi said, "Instead of increasing leverage, companies sought to secure cash through apartment sales," adding, "During this process, companies like Hengda Group and Huaxia Xingfu, which pursued aggressive debt management strategies, struggled with liquidity management."
Bond prices of real estate developers are expected to remain highly volatile in the second half of the year. Although these companies are reducing debt, 71% of them still fail to meet policy requirements. Furthermore, with ongoing regulations in the second half, commercial banks' lending support is expected to weaken, and the sales growth rate, which was favorable in the first half, is likely to slow down.
However, experts generally agree that the deterioration in the financial structures of real estate developers is an issue limited to individual companies. First, the possibility of Hengda Group's bankruptcy is low. Researcher Choi stated, "If their financial situation were bad enough to cause default, other banks besides Guangfa Bank would have requested asset freezes, but there have been no such moves yet," and explained, "Hengda Group has many subsidiaries unrelated to real estate, such as bottled water and automobiles, which can help raise funds." Additionally, the easing of the People's Bank of China's monetary policy is a positive factor. On the 9th, the People's Bank of China unexpectedly cut the reserve requirement ratio by 50 basis points (1bp = 0.01%).
Rather, this situation is expected to create a favorable environment for growth stocks. Researcher Choi said, "The current problems of Chinese real estate developers increase the likelihood of additional monetary easing, including reserve requirement ratio cuts aimed at economic recovery and financial system stability," adding, "Because the Chinese government's support and regulatory direction are clear, growth stocks have greater potential for gains."
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