Pitch "Sharp 30% Drop in China's Home Sales Triggers Surge in Negative Cash Flow Real Estate Firms"

[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] The Chinese real estate market slump is expected to continue into next year, with credit rating agency Fitch warning that in the worst-case scenario, one-third of major Chinese real estate companies could face negative cash flow, CNBC reported on the 27th (local time). Cash flow refers to the actual amount of cash generated through operations, and negative cash flow means that the company is not earning money, which could lead to a decrease in the company's assets.

In a report released on the 20th, Fitch warned that if Chinese home sales drop by 30%, 12 out of 40 Chinese real estate companies rated by Fitch could experience negative cash flow.

Recently, Chinese home sales have declined for five consecutive months. November sales fell by 16.31% compared to the same month last year. In November, new home prices dropped by 0.3% month-on-month, marking the largest decline since February 2015.

Fitch explained that the 30% drop in Chinese home sales assumes an extreme scenario, and its baseline forecast scenario is a 15% decline in home sales. In this case, Fitch expects that five companies could record negative cash flow.

This year, the liquidity crisis of Evergrande Group, the second-largest real estate company, was revealed, causing the Chinese real estate market to rapidly slump in the second half of the year. Evergrande Group was rated as in default earlier this month, followed by a series of defaults among real estate companies.

The liquidity crisis among Chinese real estate companies is expected to continue.

Nomura Securities estimated that the amount of dollar bonds maturing in the first quarter of next year for Chinese real estate companies will reach $19.8 billion, nearly double the $10.2 billion in the fourth quarter of last year. Nomura also estimated that bonds worth $18.5 billion will mature in the second quarter of next year.

Fitch predicted that companies rated B or below, which are effectively considered to be in default, will face not only increased principal and interest repayments but also pressure for early repayment.

Transparency issues have also emerged among Chinese real estate companies. In the case of Huayangnian, a Chinese real estate company, undisclosed private bonds not recorded in financial reports were revealed, causing controversy. Fitch pointed out that if the issue of hidden bonds becomes prominent, the liquidity environment for real estate companies could worsen further.

Fitch forecasted that funding conditions for the Chinese real estate development industry are unlikely to improve significantly until the second half of next year.

This content was produced with the assistance of AI translation services.