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Real estate stock slump shows limits of yuan devaluation

The Chinese real estate sector was among those to be hit hardest by the devaluation of the yuan as investors became concerned about the level of dollar exposure.

China's property sector has been an obvious driver of Chinese growth in recent decades, with skyscrapers erupting out of farmland as the population urbanized. But while it is one of the least exposed sectors to trade tensions, real estate companies have been allowed to tap foreign debt markets and are exposed to a devaluation of the yuan.

The S&P China 500 Real Estate index tracked by S&P Dow Jones Indices shed over 4% on Aug. 5, falling to a seven-month low.

"If underlying yuan is getting weaker then that could put a bit of stress on companies with dollar debt. That's why China doesn't want to see such a big move in the currency," said Daryl Liew, head of portfolio management at Singapore Investments.

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In 2018, China's National Development and Reform Commission allowed Chinese developers to raise funds offshore, lifting measures that had limited refinancing through bond issues. This has continued to flourish into 2019 according to CreditSights, which notes that issuance in June 2019 totaled $37 billion, more than 3x the amount raised in June 2018.

"Yuan depreciation against the dollar could hurt developers with unhedged foreign currency debt, although generally the developers still raise the majority of their funding in yuan-denominated construction loans," CreditSights analysts led by Sandra Chow wrote in an Aug. 6 note. "Everything depends on the magnitude of the move," Liew said. "A 1.5% move shouldn't cause too much of a problem for the market."