Property Sector a “Minefield” for Non-performing Debt: China Orient Asset Management Report

A new report on China’s non-performing debt from one of the country’s big four asset management companies highlights risk in relation to the property sector.

The “China Financial Non-performing Assets Market Survey Report” (中国金融不良资产市场调查报告) released by China Orient Asset Management on 10 April found nearly 40% of survey respondents expect the Chinese property sector to see the most pronounced growth in non-performing bank loans in 2019.

According to the report the rapid growth of China’s property market has for many years relied upon heavy leverage, yet the launch of stricter property financing policies in 2018 has staunched the circulation of funds for real estate companies.

The report expects funding sources for Chinese real estate companies to remain constricted in 2019 as a result of the continuation of these and other property market control policies, in tandem with a fall in land auction premiums and reduced monetary compensation for shantytown upgrades.

Financing costs are set to increase, with the attendant risk of a rise in hidden inventories as well as a sharp drop in property prices in certain areas.

The report points out that the increasing pressure on cash flows for real estate companies resulted in a number of defaults amongst their ranks in 2018.

The annual reports of listed Chinese real estate companies indicate that their overall gross profit rate stands at 20 – 30%, while their average debt-asset ratio is around 80%.

Should the real estate sector see a sizeable decline in 2019 and a fall in property prices of around 20 – 30%, this will have a severe impact upon the repayment capability of real estate companies and lead to sharp rise in non-performing loans.

The report also found that 44.55% of survey respondents expect China’s non-performing debt ratio to peak in 2020 before gradually subsiding, and that the majority of respondents foresee an expected rate of return for non-performing assets of at least 15%.

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