Chinese developers to brace for drying liquidity conditions

    China's crackdown on shadow banking has choked off an essential cash channel for property developers, increasing liquidity risk. That's according to a report titled "Chinese Developers Feel The Strain Of The Liquidity Drain" that S&P Global Ratings published today.
  The credit rating agency expects industry conditions to become tougher, given Chinese developers' record high debt maturing in the next two years and the central government's deleveraging campaign. Loans will be more difficult to roll over and funding for expansion will be hard to come by.
  "As liquidity remains tight and funding costs rise, cash generation ability, shadow banking exposure, and amount of puttable bonds due this year will be the key differentiating factors for the developers we rate," said S&P Global Ratings credit analyst Esther Liu.
  On average, shadow banking constitutes about 20% of the total debt of our rated developers. However, this proportion varies greatly from about 10% for developers in the 'BB' or higher rating category to more than 40% for those with 'B' and lower ratings.
  It thinks developers with greater exposure to shadow banking will find it tougher to refinance. The crackdown on shadow banking has severely restricted access to the more heavily scrutinized channels such as asset management plans and entrusted loans. This puts pressure on developers rated 'B' and lower as they now have to consider alternate ways to refinance a large portion of their total debt.
  "Although a severe liquidity crunch could weaken the liquidity positions of about 40% of our rated developers, possibly resulting in downgrades, this is not our base case," said Liu.
  "The stronger developers benefit from good cash generation from steady sales growth, stronger balance sheets, and low exposure to shadow banking. And the lower rated developers would likely resort to asset disposals and sell land from their reserves to preserve liquidity." Liu added.