Financially Starved

Clouds are gathering over the real estate market as property developers experience financing strains.

The operating net cash flow of the 84 listed Chinese property developers had stood at -70.59 billion yuan (-$10.79 billion) by the end of 2010, decreasing by 115 billion yuan ($17.7 billion) from that in 2009, according to data from the Wind Information Co. Ltd.

As the domestic monetary environment tightens and home sales nose-dive, the developers are coming under growing financial pressure to lower prices, said Yang Hongxu, a senior analyst with the E-house China Research and Development Institute.

Since 2010, the People's Bank of China, the central bank, has raised interest rates four times and hiked the ratio of deposits commercial banks must set aside in reserve nine times.

"The balance sheet of China's property developers will become tighter as most of them rely heavily on sales proceeds to service large land payments," said Zhuang Jian, an economist with the Asian Development Bank, China Office.

"Financing of developers is a key factor to impact house prices," said Chen Zhi, Deputy Secretary General of Beijing Real Estate Association. "An encouraging sign is many developers are offering discounts to lure buyers."

In search of a source of capital, many property companies are looking beyond China's borders. Chinese developers have raised more than $3 billion in overseas bond markets, said the credit rating agency Standard & Poor (S&P).

Bond sales could only temporarily improve liquidity, and aggressive developers that have relied on borrowing to fund growth could be at risk as measures to cool the housing market start to bite, it said.

"Rising leverage and volatility in the real estate market are a risky combination for developers," said S&P credit analyst Bei Fu, "The companies' liquidity could come under pressure if transaction volumes or average selling prices dramatically drop."

Those developers that have acquired expensive land at the peak of the market cycle are particularly vulnerable, said Fu.

Funds' Downturn

For China's fund management companies, 2010 meant more despair than cheer.

The Beijing-based Tianxiang Investment Consulting Co. Ltd. said 729 funds operated by the country's 60 fund management companies generated profits of 5.08 billion yuan ($781.5 million) last year, falling from 910.25 billion yuan ($140 billion) in 2009.

The biggest losers were the 300 stock funds that suffered a combined loss of 35.53 billion yuan ($5.5 billion), as the stock markets turned bearish amid investor worries that more aggressive tightening policies are in the pipeline. The Shanghai Composite Index tumbled more than 14 percent in 2010, one of the worst performances among major global markets.

Of the 60 fund management companies, 24 were swimming in red ink while 36 stayed in the black, said the report.

Looking ahead, fund managers are divided on where the stock market is heading. "Solid economic growth will continue to positively impact the stock markets this year," said Sun Jianbo, a fund manager at the Huashang Fund Management Co. Ltd. "The biggest concern remains to be inflation that may prompt policymakers to further tighten the monetary environment."

"Market confidence is picking up as inflation is expected to peak in mid-year," said Wang Yawei, Deputy General Manager of China AMC Fund Management Co. Ltd. "Cheap valuations and improved corporate earnings outlook will also provide a floor under the equity markets," he said.

Wealth Boom

China had 960,000 millionaires with personal wealth of at least 10 million yuan ($1.5 million) this year, jumping from 825,000 in 2009, according to the 2011 Hurun Wealth Report. This is the third year of the annual report jointly released by the Hurun Research Institute and the think tank GroupM Knowledge Center.

Rising property prices and a fast-growing economy have been the key drivers for the wealth boom in the country, said Rupert Hoogewerf, founder of the institute.

The report said 55 percent of Chinese millionaires derived their wealth from private businesses, and 20 percent are property speculators who have ridden the fast hike in home prices. About 15 percent are stock gurus, while the remaining 10 percent are high-earning salaried executives.

Despite the government's efforts to cool the housing markets, China's millionaires have strong confidence for the property sector and China's overall economy, said Hoogewerf.

"The government's austerity measures may have impact on new wealth creation, but it is less likely to affect the rich's appetite for luxury products," Hoogewerf said.

"For most luxury brands, China is the favorite market, with their fastest growth or the largest market share being here," he said.