The Peral Group

By TOM ORLIK

China’s property sector might be sinking in the sand of mounting liabilities.

The official data suggest that loans to China’s thousands of developers at the end of the first quarter totaled a manageable 3.6 trillion yuan ($570 billion), equal to just 6.3% of total yuan loans in the banking system.

A look at the financials of 159 mainland-listed developers, though, suggests the official numbers are not telling the whole story. Numbers from Wind—a China data provider—show total liabilities for this subset ballooned to 1.8 trillion yuan in the first quarter of 2012. That’s more than 100% higher than the level when the government first pointed its policy needle at the property bubble in early 2010.

Mounting liabilities reflect a variety of factors. In 2010, despite declaring war on house prices, the government was slow to clamp down on credit. By 2011, loans were in short supply but developers allowed other liabilities like supplier invoices to mount. Most recently, lending rebounded in the first quarter of 2012, listed developers borrowed 48 billion yuan, more than twice the figure for all of 2011.

Official data might also understate the banks’ exposure to property. Alongside bona fide developers, state-owned enterprises are sometimes tempted to dabble, either as developers or speculators. Some loans intended for building blast furnaces or shipping fleets actually end up as luxury apartments.

The banks are also exposed through the use of property as collateral. At Bank of China,3988.HK -0.98% for example, 39% of loans were secured on property and other immoveable assets at the end of 2011. The risk is that a sharper-than-expected price fall would hit developers’ ability to repay loans at the same time as the a decline in the value of property banks hold as collateral.

China’s real-estate sector is in a policy-induced correction, with sales and prices both down from a year ago. Despite that, signs of a modest recovery in demand and easier access to credit in recent months have made markets optimistic about the prospects of a soft landing. Listed mainland developers have rallied strongly in Hong Kong this year.

If sales continue creeping higher, most developers are well placed to cover their debts. But if sales dry up, higher debt than is recognized in official data means the foundations of China’s real-estate sector are less solid than they appear.