Falling home prices and sales are pressuring liquidity and margins of Chinese property developers, raising concerns that smaller companies may be pushed to the brink of collapse.

Several developers are slashing prices, some as much as 30 percent according to media reports, to boost liquidity, a move which analysts warn may spread to the entire industry.

The fire sale comes at a time when property companies find it increasingly difficult to borrow, threatening to worsen their cash flows. Local banks are cutting off lending to developers at Beijing's direction and global markets are all but impossible to access given the euro-zone crisis.

It indicates what they see as the outlook for the next six to 12 months, said Stephanie Lau, China property analyst at Mirae Asset Financial Group.

The game plan is to secure volume now. You want cash flow rather than margin.

Cash is harder to come by and profits are shrinking. Half the property companies listed in China and Hong Kong saw cash flows dropping for their most recent fiscal year, according to data from Thomson Reuters' StarMine. And 115 of the 261 companies reporting profits saw margins shrink.

ANZ's credit-trading team said they see a real risk of one or two developers defaulting on their bonds, which is spreading contagion even to the top developers.

Greentown China Holdings has the worst credit rating among Chinese developers, according to data from StarMine, with a score of just 1 out of 100.

SRE Group scored 5, while Evergrande Real Estate and Coastal Greenland both have a score of 6, well below the sector's average of 48.

Greentown China, SRE and Shanghai Industrial Urban Development Group also have poor credit ratings from ratings agency Standard & Poor's.

The companies said they did not face any risk of failure despite difficult market conditions.

Since August, S&P has downgraded Coastal Greenland, Shanghai Zendai Property and SPG Land on reasons ranging from weak liquidity to refinancing risk and loan-covenant breach.

They are quite small, and the liquidity is weak. That liquidity pressure is mounting, said Frank Lu, associate director of corporate ratings in Asia for S&P, adding several companies, especially the smaller ones, are at risk.

The agency rates only three of the 30 Chinese developers it tracks as investment grade: China Overseas Land & Investment Ltd , the country's largest property developer by market value, China Resources Land and Franshion Properties .


Average home price in China's 100 key cities fell 0.23 percent in October from a month earlier, the second straight monthly drop, a survey said.

But data from Thomson Reuters' Datastream sends a more worrying sign about China's cooling property market.

The average sales price index of the residential market in China has gradually fallen since February last year and stands at 100, just 5 points shy of its all-time low of 95 hit in early 2009.

Bigger companies are making big cuts because they need sustainable growth, said Nicole Wong, the head of Hong Kong and China property research at CLSA Asia-Pacific Markets.

Smaller companies might just sell out whatever units they have and then go into hibernation.

Some developers have even opted to exit the residential sector altogether.

Shenzhen-listed Yang Guang Co has said it will focus on commercial development, instead of also building homes. Last month it agreed to sell four residential projects to Beijing Capital Land for 1.6 billion yuan ($252 million).

Among a handful winners are large developers such as China Vanke and China Overseas Land, analysts said.

China Vanke is well-positioned to benefit from the slump because it focuses on smaller, first-home properties, which are more resilient and not being targeted by Beijing, according to CLSA's Wong.

Country Garden Holdings is another potential winner, thanks to its ultra-short development cycle, Wong said. It builds and sells homes quickly, which should sustain cash flow. ($1 = 6.346 Chinese yuan)