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COMMENTARY

There are tentative signs that wild beasts of Chinese real estate are growing up

LAST September, China's third biggest real estate developer said something that sent shivers throughout the country and beyond.  China Vanke's goal for the next three years would be simply "to survive", its chairman Yu Liang warned.

This was a startling admission from one of the few investment-grade companies in the sector, acknowledging the severe squeeze from Beijing's deleveraging campaign. 

Mr Yu's remark was timely. Shortly afterwards, the average yield for Asia's dollar junk bonds, which is largely determined by Chinese property developers' notes, soared.

What a difference six months makes. Now real estate companies are thriving. This year, Vanke managed to quickly sell more than 70 per cent of 126 luxury apartments available at the launch of a new riverside project in Shanghai.

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They were priced between 25 million yuan (S$5 million) and 35 million yuan each, a pretty striking sign of returning confidence.

On average, sales at listed Chinese property developers should increase by 18 per cent this year, according to estimates from Credit Suisse Group.

Most importantly, developers can refinance again. Yuzhou Properties, a junk-rated real estate group, has been given the nod by regulators to issue 3.5 billion yuan of notes after a dry spell of two long years. The worry, of course, is that Chinese developers remain reckless and will take bond investors' money for a wild ride.

What's stopping, for example, China Evergrande Group from using the US$3 billion it raised in January to invest in electric vehicles, its chairman Hui Ka Yan's new pet project? 

Yet there are tentative signs that the sector - sick of being burned by China's frequent credit cycles - is starting to grow up.

Just look at how it reacted to Beijing's project to slash corporate debt. In 2018, new real estate project starts soared by 17 per cent from a year earlier, but completions (measured by floor space) tumbled by 17 per cent.

One explanation, according to Macquarie Bank economist Larry Hu, is that developers were prudently trying to speed up their cash turnover.

Seeing a long winter ahead in terms of debt funding, companies were keen to cut their land bank exposure and pre-sell the properties from their development projects as early as possible.

Then they could take their time to finish the construction phase.  As a result, China's developers have become better at cash collection than ever.

Last year, the sector's cash flow from operations, including mortgage payments and deposits from pre-sales, accounted for almost 48 per cent of its total funding, a record high.

While developers still depend heavily on bank loans and "self-raised funds" (either cash on hand or money raised from shadow banking), they are getting wiser.

There's a shift in attitude too. Sunac China Holdings just posted stellar earnings, with a 50 per cent profit surge last year, yet its founder Sun Hongbin remains cautious about land purchases.

This follows a more disciplined approach by listed developers overall in 2018, with new land acquisition accounting for only 42 per cent of sales, versus 72 per cent in 2017. 

One can see the rationale for treading more carefully. I can count at least three big Chinese credit cycles in the past decade alone.

There was the four trillion yuan stimulus after the collapse of Lehman Brothers, the local government financing vehicles in the summer of 2012, and the People's Bank of China's interest rate cuts in late 2014.

And now the tap is being re-opened after the squeeze of the previous two years. In between Beijing's bouts of generosity, there are always painful periods of fasting.

In an economy with such short liquidity windows, it appears it might be possible to tame even the wildest corporate beasts. China's notoriously debt-hungry developers may just learn to slim down. Who knows, a few more might even become fit for investment grade one day.BLOOMBERG