China’s Evergrande Group and other prominent real estate companies have been defaulting on their debts, causing turmoil in global stock markets. According to Bloomberg, as of Oct 29th, two-thirds of the top 30 property developers ranked by the China Real Estate Information Group (CRIC) in terms of revenue have stepped on the “three red lines” of real estate financing rules, raising fears that more property developers will default on their debts.
To avoid the housing market bubble, the Chinese Communist Party set out the “three red lines” of real estate financing rules in August 2020, including real estate companies’ gearing ratios greater than 70%, net debt ratios greater than 100%, and cash to short term debt ratios less than one after excluding pre-receipts, and real estate companies must fully comply with the “three red lines” within three years.
According to the Chinese media, more than 300 real estate companies, including Evergrande, Fancy Year, and Synergy Group, have been reported to have failed in their business this year alone, affecting the steel and building materials machinery industries as well.
According to CRIC’s data, Evergrande Group, which has more than 300 billion dollars of debt, and China Railway Construction Group, which is heavily indebted, have stepped on two “three red lines.” Cumulatively, a total of 9 real estate developers such as Evergrande Group and Contemporary Land have defaulted on their debts since this year.
Nomura Holdings analysts estimate that Chinese developers raised more than USD 5 trillion in debt during the boom. This debt size is almost double that of late 2016. It is also higher than Japan’s overall economic output (GDP), the world’s third-largest economy, last year, as global markets brace for a possible wave of defaults in China.
China’s leading real estate company Yangcheng also released its third quarterly report on the evening of Oct 28th. In the first three quarters, Yangcheng achieved revenue of CNY 41.333 billion (about USD 6.49 billion) net profit attributable to shareholders of the listed company after non-recurring gains and losses amounted to CNY 86.714 million (approximately USD 13.55 million), down 96.89% year-on-year.
In the third quarter, the number of financial indicators of the company declined; revenue was CNY 11.401 billion (about USD 1.78 billion), down 18.24% year-on-year; net profit attributable to the mother company was CNY 919 million (about USD 143.81 million), down 11.57% year-on-year; net profit after non-recurring profit was a loss of CNY 1.752 billion (about USD 0.27billion), down 274.27% year-on-year.
On the same day Sunshine City released its third quarterly report, the company was downgraded by Fitch. Its long-term foreign-currency issuer default rating (IDR) was downgraded from “B+” to “B-” with a “negative” outlook, and Sunshine City’s senior unsecured rating was downgraded from “B+” to “B-” with a “negative” outlook. Sunshine City’s senior unsecured rating was downgraded from “B+” to “B-“, and the “RR4” recovery rate rating was maintained.