Short-term Capital Flows Out With Weaker Yuan

Short-term Capital Flows Out With Weaker YuanOn 11th August, The People’s Bank of China devalued its currency by close to two percent against US dollars, triggering concerns over an impending free-falling currency and a shift of investment capital into offshore property markets. While most predict the Renminbi depreciation against major international currencies would badly hit the real estate market, some market research suggests otherwise. Generally speaking, the negative impacts of devaluation on the Chinese property market are only short term, and irrelevant to the structural problems, such as oversupply and dwindling demand. In the long run, the Chinese property market would still be backed by the high, stable local demand, suggesting it is at the start of a recovery stage after a year-long slump

However, some heavily indebted property developers could face extra pressure to serve their bond obligations upon the devaluation, since they have been raising capital from overseas markets in recent years. Sources revealed that more than one-third of developer debt has been borrowed in foreign currencies, denominated in US dollars or Hong Kong dollars. The market expects that the Renminbi could depreciate further amid continuously weak exports. Developers’ profit margins could be reduced by 20% - 30% for the worst cases. Some indebted developers could possibly come under financial stress.

Property sales improved in the first half of 2015, thanks to the government’s easing policies in monetary and real estate markets, which also eased the developers’ pressure to meet their annual sales targets. During the period, commodity property transaction registered a 4% Y-o-Y growth with a total of 5 million square meters.