He and hundreds of Chinese developers boosted investment by 29% last year
The bond market is telling Li Ka-shing, Asia's richest man, he is sitting on a Chinese property bubble that's bigger than the one deflating in the United States.
Bonds of China's Agile Property Holdings Ltd yield 7.17 percentage points more than US Treasuries, double the premium in July and 1.79 percentage points more than the debt of Los Angeles-based KB Home, which has the same credit ratings. Agile, a housing developer in the southern province of Guangdong, and Country Garden Holdings Co, China's most-profitable builder, cancelled debt sales in November when borrowing costs climbed.
As China's government attempts to cool property prices with limits on lending, developers are in a land grab.
Mr Li, who made his fortune in Hong Kong real estate, Chinese billionaire Xu Rongmao, who owns Shimao Property Holdings Ltd, and hundreds of local developers boosted investment 29 per cent in the first eight months of 2007, the National Bureau of Statistics said.
'If the government decides to impose further restrictions, most if not all of the developers will go bankrupt, depending on the severity of the restrictions,' said Eugene Kim, chief investment officer of Hong Kong-based Tribridge Investment Partners Ltd, a US$200 million hedge fund. 'That makes us very selective in terms of which bonds we buy and the spreads we require to compensate for risk.'
Mr Kim said he has trades set up that would profit from a decline in prices. New York-based Merrill Lynch & Co, the world's biggest brokerage, rates China property companies 'underweight', meaning investors should own a smaller percentage of the debt than contained in benchmark indexes.
Home prices in Shenzhen, a city north of Hong Kong, were 18.6 per cent higher in November than a year earlier, according to a National Development and Reform Commission survey. They rose 14.9 per cent in the capital city of Beijing and 16.4 per cent in Beihai, in Guangxi province.
The People's Bank of China last month raised its benchmark one-year lending rate to a nine-year high and increased reserve requirements to the most since at least 1998. The government increased the minimum down payments on apartments to 40 per cent from 30 per cent in September.
Signs of a shift are already emerging. The nation's largest publicly traded developer, Shenzhen- based China Vanke Co, sold property worth 4.23 billion yuan (S$832.7 million) in November, 18 per cent less than in October.
Chinese developers are among the most vulnerable of any group in Asia to downgrades because a slowdown in home sales would deplete cash, said Clara Lau, an analyst at Moody's Investors Service in Hong Kong.
'They have been growing aggressively, with the view that if they don't buy now, it will be more expensive for them later' to acquire land, Ms Lau said.
Standard & Poor's cut the credit ratings of Greentown China Holdings Ltd, the largest builder in Zhejiang province, one level to BB- on Dec 3 due to 'increasingly aggressive land acquisitions'. Its US$400 million of 9 per cent bonds yield 11.2 per cent, up from 9.6 per cent in November.
Bond sales by developers rated at least BB, or one to three levels below investment grade, may rise 10-fold to more than US$15 billion, Todd Schubert, a Singapore-based credit analyst at Deutsche Bank AG, said in a Dec 7 report. Developers issued US$1.4 billion of dollar-denominated debt in 2007, compared with about US$5.5 billion from their US counterparts, according to data compiled by Bloomberg.
'Each company knows that the window of opportunity is small and they want to be the one to fit through the window,' Mr Schubert said in the report.
Agile pulled a US$400 million debt sale in November after its borrowing costs surged to a record. The spread on the company's US$400 million of 9 per cent debentures due September 2013 widened to 7.17 percentage points from 3.23 percentage points on July 2. That caused the value of the bonds to fall 10 per cent. -- Bloomberg
Source : Business Times - 10 Jan 2008
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