China's property sector, already a nagging economic risk, could become a victim of the unexpected weakening of the country's currency as developers face rising debt costs.
"Most Chinese developers are heavily exposed to U.S. dollar debt (up to 90 percent of their total debt) with no hedging," Credit Suisse said in a note Monday. "A potential renminbi depreciation may have a meaningful impact on both developers' earnings and net gearing – especially since Chinese developers are already highly levered financially."
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The fate of China's property sector is closely watched as a key economic risk. Capital Economics estimated that the property sector contributed 9.5 percent of China's gross domestic product (GDP) in 2013.
The renminbi, also known as the yuan, unexpectedly weakened recently, depreciating around 1.7 percent against the U.S. dollar since the beginning of February. The move caught many investors off guard as yuan appreciation was widely seen as a one-way bet. The currency has attracted considerable foreign investor demand over recent years on its steady appreciation and relative stability.