Evergrande seeks bankruptcy protection in US, as other developers' woes mount

Experts have called for stronger and more detailed measures to improve home buying sentiment and boost the recovery of the real estate sector through stimulating demand, especially in first-tier cities, as liquidity stress among Chinese developers has reappeared in recent days.

While it seeks to restructure, China Evergrande Group, a prominent property developer with debt troubles, filed on Thursday for protection of its United States assets from creditors in a bankruptcy court in New York, according to court documents.

On Friday, China Evergrande said in a statement that the application for bankruptcy protection is a standard procedure for offshore debt restructuring and does not involve a bankruptcy petition.

The filing came amid worries over financial difficulties of other giant developers like Country Garden and Sino-Ocean Group, which have also missed some interest payments.

"A sluggish housing market and tight funding access have jointly worsened cash liquidity for Chinese developers, which may lead to debt crisis for some," said Li Peijia, Bank of China's senior analyst and team leader of finance researchers.

Roughly 45 percent of capital utilized by developers in China comes from financing channels like credit or bonds, she said, adding that the bonds issued by the real estate industry had slumped 7 percent year-on-year as of the end of June, while the declines in bonds overseas and trusts they raised were as sharp as 34.6 percent and 69.6 percent, respectively.

"It will take time for developers to fully clear their debt risks. The key is to boost property recovery. If the housing market stabilizes, the liquidity of developers will be improved and restored," Li said, adding that it is time to review real estate policies, including existing restrictions on home purchases and loans.

Feng Lin, a senior analyst at Golden Credit Rating, expects a raft of detailed measures to be rolled out, as a tone-setting meeting of the Political Bureau of the Communist Party of China Central Committee on July 24 concluded that major changes have taken place in the relationship between supply and demand in China's real estate market.

Feng suggested lowering mortgage rates, including those of existing loans, and loosening property purchase and loan policies in first-tier cities. The latter, she said, will increase secondhand home transactions in major urban areas and help improve market confidence in lower-tier cities.

"For instance, authorities (in first-tier cities) could step up support for people using provident funds to buy homes, accelerate the implementation of ownership transfers of mortgaged homes without requiring the paying off of the original loans, and qualify buyers owning no residential property as first-time buyers to enjoy favorable mortgage rates," she said.

However, Li, the BOC researcher, said that because of huge spillover effects, easing home purchases and loan restrictions in first-tier cities should be done very prudently and not too suddenly or hastily.

Many smaller cities have eased their restrictions on home transactions and loans without delivering enough desirable effects.

Data released by the National Bureau of Statistics on Wednesday showed that of the 70 Chinese cities tracked, 20 reported month-on-month growth in new home prices in July, 11 fewer than a month ago.

Measured in terms of year-on-year performance, the number of cities reporting year-on-year price rises was 26, compared to 27 in June.

However, despite causing some downward pressure, the tepid property sector will not pose a systemic risk to financial markets or the overall economy, experts argued.

Elaine Xu, director of the APAC Financial Institution at Fitch Ratings, said although home buying sentiment remains weak, there will be no material impact on the credit profiles of banks rated by Fitch, given their generally manageable and declining direct exposure to developers.

Li, from the BOC, added that real estate investment trusts (REITs) in China are much smaller compared with developed economies like the US, and therefore have very limited impact in terms of systemic financial risk. "Debt crises among some developers will not spill over to cause difficulties in overall financial markets, as the Chinese government has adopted effective measures to deal with developers' debt risks, including special loans to help them finish stalled presold housing and strengthening coordination at the local government level," she said.

Outstanding special loans to help developers finish stalled presold housing stood at 500 million yuan ($68.6 million) by the end of June, and the special loans will be extended to the end of May next year, the People's Bank of China, the central bank, announced on Thursday.