China firms may take a beating from forex losses


  • Business
  • Saturday, 22 Aug 2015

Slowdown in Johor property market likely to hurt them further

THE devaluation of the yuan, coupled with the weakening ringgit against most currencies, is expected to saddle Chinese companies with foreign exchange (forex) losses as a result of huge US-dollar debts at a time when the Johor property market is slowing down.

This may impact the already-weak Johor property market, particularly Iskandar Malaysia where Chinese developers have most of their land.

In the second quarter of this year, state-owned Greenland Holding Group Co Ltd reportedly bought 3,000 acres of industrial land in addition to 140 acres, also in Johor.

Country Garden Holdings Co Ltd, meanwhile, launched about 9,400 condominium units in 2013 in Danga Bay. At press time, 6,400 units had been sold. It plans to build more units on that 57.11 acres of reclaimed land.

Ultra-low US lending rates versus the high interest rates of between 5% and 6% back in China and tight lending conditions have driven many Chinese companies to look abroad to borrow more cheaply. Because US lending rates are low at 0.25%, these Chinese companies rapidly accumulated US-dollar debts, starting from 2010/2011, according to Bloomberg data.

Many of these Chinese companies borrowed massively in order to invest abroad, as the economy back home showed signs of slowing. Anyway, that was the Chinese government’s plan – for Corporate China to venture abroad.

They went to Britain, the United States and Europe. Some of these property developers arrived in Malaysia too. They were very aggressive in their land purchases, which sent land prices soaring. Some of them bought reclaimed land in Danga Bay, previously known as Lido Beach.

Because they were willing to pay high prices, the arrival of these aggressive Chinese developers drove prices up and upset local developers.

Among the Chinese developers who descended on Johor include Country Garden, Greenland and Guangzhou R&F Properties Co Ltd.

They brought along with them the same strategy of bulk-buying and bulk-building high-rise units, something not seen in the Johor market. Their show villages were instantly created and were very impressive because they were willing to spend, unlike local developers, some of the property agents in Johor say.

Guangzhou R&F said in its 2014 annual report that it was attracted to Malaysia because of “the breadth of the potential customer base”, which includes Malaysians, Singaporeans and mainland-Chinese investors. It contracted sales of 1.69 billion yuan when it launched in August 2014, less than eight months after signing the sale and purchase agreement for the land.

As more units flood the market and with the recent yuan devaluation, the situation has turned. The signs were there if one had been attentive. Since early-2014, the overall property market in Malaysia had started to slow down as a result of various cooling measures.

In Johor, the situation is precipitated with the heavy focus on high-rise projects by both local and mainland-Chinese developers the last several years. The pending rate hike to be announced by the Federal Reserve next month or later in December and the volatile overall global climate were of no help.

The ringgit has declined close to 15% against the US dollar and the offshore yuan is softer by 3.43%.

About 71.92% of state-owned Greenland’s total debts totalling US$4.98bil are in US dollars, according to Bloomberg data. The scenario is the same in Country Garden, where 75.99% of its total US$5.48bil debt is in US dollars, and Guangzhou R&F, where 66.17% of its US$3bil debt is in the greenback.

These forex losses are expected to impact these companies’ balance sheets, particularly when the debt matures beginning 2017 onwards. Chinese property developers have been the most aggressive borrowers in the offshore market.

Country Garden will have about US$1.60bil due in 2018, and another US$1.36bil in 2019, according to Bloomberg data. Greenland, meanwhile, has about US$2bil due in 2017.

Chinese real estate firms have US$62.5bil in dollar bonds sitting on their balance sheets, as their offshore bond market grew from almost nothing before 2011, according to The Wall Street Journal Asia. Most of them did not hedge in order to save costs and because they had confidence in the-then appreciating yuan.

Frequent issuers such as Country Garden and Agile Property Holdings Ltd top the list of home builders with foreign-debt loads.

The Chinese companies did not respond to questions e-mailed to their investor relations department. However, Guangzhou-based Country Garden in its 2014 annual report said its earnings would be impacted by 1.14 billion yuan if the Chinese currency were to fall 5% against the greenback. A 5% drop in the ringgit would cost the company 66.08 million yuan.

All in, Country Garden’s forex risk can sum up to as much as 1.4 billion yuan based on a 5% sensitivity for financial year 2014. Comparatively, Country Garden’s profit was at 10.23 billion yuan during the year, implying that foreign risks might affect its bottomline by as much as 14%.

A spokesman told The Wall Street Journal Asia on Aug 14, “Since end of last year, we have been reducing our US-dollar debt exposure and have borrowed more from onshore. We are closely monitoring the forex market to see whether anything more can be done.”

Country Garden issued six billion yuan in domestic bonds this month.

In its latest interim report ended June 30, Country Garden said its net forex losses on financing activities was at 79.44 million yuan, which is 25% lower compared to a year earlier.

The company said it manages its forex risk by closely monitoring the foreign currency rate movement and would look to adopt a foreign currency hedging policy to manage risks better.

For Greenland, it would have a 380.5 million yuan forex exposure based on a 5% sensitivity analysis. The company had a net profit of 64 million yuan in the same financial year, according to its 2014 annual report.

China’s move to let its currency trade more freely may appear to cost investors more to put their money elsewhere. But it could instead see more money flowing out of the republic, as investors look to diversify their investments.

Hong Kong-based Credit Suisse property analyst Du JinSong tells StarBizWeek: “Most Chinese companies do not hedge because they are confident of a strengthening yuan.”

Although the devaluation is “small” - about 3% against the US dollar – there may be “a gradual depreciation in the next six months”.

“Not a sharp depreciation but a gradual one like what we have seen so far,” he says.

It was not so much the quantum but the surprise move that took the market by storm, and because of the size of the overall Chinese market.

Du says the yuan has been strengthening the last nine years and many among the Chinese had expected that to continue.

Although the quantum over the three consecutive days of devaluation last week was not large, HSBC Holdings plc group general manager and global head (trade and receivables finance) Stuart Tait says because of the size of China’s economy, that minor drop has proven to be major.

“It underscores the size of the Chinese economy,” he says.

He says although there have been comments that a 10% drop would be more effective, “that is not going to happen”. He opines that the yuan could depreciate around 3% in the near future.

Since the announcement by the People’s Bank of China, the yuan has depreciated by 2.9% to 3% to just below the 6.4 level against the greenback.

“The yuan will be more flexible going forward,” says London-based Tait, who was in Malaysia for a HSBC event.

Nonetheless, as China slows and South-East Asian currencies continue to be buffeted by overall weak sentiment, the picture ahead for the region may not be all that rosy.

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