SINOWEEKLYPLUS

Trump gets two-for-one in scrapping N. Korean summit; Vanke’s total debt exceeds 1 trillion yuan

SinoInsight 1
On May 26, the developers of luxury residential property in Shenzhen announced the third phase sale of 167 residential units. Sale of the units would commence on May 30, with the cheapest units going for 16.7 million yuan (about $2.6 million) and the most expensive at 65.5 million yuan.

According to the developer sales plan:

  • Buyers need to be audited first to qualify to purchase a unit, and pay a 5 million yuan “good faith” deposit upfront.
  • The Notary Office would supervise the housing raffle on site.
  • Buyers are allowed no more than 2 minutes to select their units on site.

OUR TAKE
The “raffle” model of selling houses was first implemented in Shanghai in May 2017, and was later adopted by some second-tier cities. The adoption of such a sales model shows that China’s real economy is increasingly being hollowed out, while the property bubble keeps growing as capital continues to flow into real estate.

SinoInsight 2
The debt ratio of property assets in China rose to 79.42 percent at the end of Q1 2018:

  • China Vanke (total assets 1.22 trillion yuan, total debt 1.03 trillion yuan), a leading property developer in Shenzhen, has a debt ratio of 84.04 percent.
  • Greenland Group (total assets 868.574 billion yuan, total debt 770.197 billion yuan), a leading Shanghai property developer, has a debt ratio of 88.67 percent.

OUR TAKE
1. Most Chinese property developers take on massive debts to spur growth. The situation with Vanke’s debt is a microcosm of China’s real estate industry.

2. A portion of Vanke’s 1.03 trillion yuan debt comprises proceeds from pre-sale housing. But after deducting the pre-sale figure, the company still has a debt of 549.567 billion yuan (debt ratio of 44.9 percent), or a debt that is about a quarter of Shenzhen’s 2017 GDP (2.244 trillion yuan). Pre-sale housing proceeds are rollovers, and there is a risk of incurring debt before the final sale.

3. When asset prices are rising, the risk of high debt becomes unnoticeable. However, having tremendous debt would become a problem as the U.S. dollar appreciates and the renminbi devalues; and with rising oil prices causing inflation and banks raising interest rates. China’s property bubble is at risk of being punctured, and heavily indebted property developers would have difficulties with their current revenue generation model.

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