Moody's: Chinese developers face rising competition as government moves to strengthen differentiated policies in the property sector

Moody's Investors Service says that Chinese developers will face increasing competition, after the Chinese government (Aa3 negative) stressed during the National People's Congress in early March 2017 that it would strengthen the execution of its differentiated policies in the country's property sector, and fine-tune measures in cities where property prices are rising rapidly.

"Chinese developers will face stronger competition in 2017, as large developers strive to capture further market share, amid the ongoing regulatory controls and likely slowdown in sales growth," says Chris Wong, a Moody's Analyst.

Moody's believes that control measures in cities where property prices are rising rapidly will remain tight or become even tighter in 2017, whereas policies in lower-tier cities where inventory is high will remain accommodative.

"Nevertheless, most of the developers that we rate will demonstrate healthy credit profiles, given their stronger sales execution and more diversified funding channels," adds Wong. "These strengths will put them in an advantageous position when compared to their smaller unrated peers."

Moody's analysis is contained in its just-released report titled "Property -- China: Chinese Developers Face Increasing Competition Amid Differentiated Government Policies".

Moody's report points out that the Chinese government's latest work report outlines the fact that the authorities will support end-user demand in third- and fourth-tier cities, where inventory levels are high. At the same time, the government will also increase land supply and fine-tune controls on the development, marketing and agency activities in cities showing overheated prices.

While the effects of increasing land supply will take time to realize, Moody's believes governments in first- and major second-tier cities will maintain or even tighten their restrictive measures to curb investment or speculative demand for properties, and to prevent an overheating of prices.

Moody' points out that the latest round of restrictive measures introduced since late September 2016 has moderated property price growth in high-tier cities in recent months.

Moody's also estimates that the effects of policies targeted at clearing inventory in lower-tier cities with high inventory levels will be mixed, because some low-tier cities will continue to show weaker economic fundamentals and net population outflows.

Overall, Moody's report says that developers rated by Moody's will likely extend their gains in market share in this challenging and competitive environment, supported by their stronger brands and execution abilities. Contracted sales for 29 rated developers rose to 26.5% of total nationwide contracted sales in 2016 from 24.0% in 2015.

As for funding conditions, issuance in the onshore bond market will become more selective and slow versus the levels seen in 2016. For example, there were only four onshore bond issues totaling RMB5.3 billion by Moody's-rated developers in the first two months of 2017 compared to 26 issues totaling RMB81.5 billion during the same period last year. Nevertheless, the impact on Moody's-rated developers will be manageable, because of their diversified access to offshore funding.

Offshore bonds issued by 13 Moody's-rated developers totaled USD4.7 billion in the first two months of 2017 as against USD1.5 billion issued by three rated developers in the same period last year.