"The liquidity positions of our 29 rated Chinese property developers are worsening, with our updated stress test now showing 11 issuers with weak liquidity versus just four in December 2011," says Peter Choy, a Moody's Associate Managing Director.

"The deterioration stems specifically from higher levels of short-term debt and lower-than-expected cash balances for end-2011 against the backdrop of slowing sales and rising inventories," says Choy.

Choy was speaking on the release of a new Moody's report entitled, Declining Liquidity for Chinese Property Developers Weigh on the Sector. The report details the results of a stress test conducted on 16 May 2012, and which was based on our forecast of the developers' liquidity positions. The report was authored by Choy and Kaven Tsang, a Moody's Assistant Vice President -- Analyst.

According to the stress test, three factors are behind the worsening in liquidity positions and the resultant difficulties that developers now face in refinancing: [1] the rise in short-term debt; [2] the fall in the amount of cash available to cover the short-term debt; and [3] constraints on offshore and onshore funding, including the regulatory curbs on trust financing.

Rising refinancing risk is greatest for lower-rated developers, although there are differences in the level of risk for individual issuers and across rating categories.

The report says that clearest divergence occurs between the prospects for developers rated single B or lower and for developers rated Ba or higher. Some of the latter have backgrounds as state-owned-enterprises (SOEs).

With the total amount of short-term debt due for repayment this year by Moody's 29 rated developers, the report puts the figure at RMB159 billion, up 23% from what a previous stress test showed in December 2011. The total breaks down into RMB128 billion of onshore debt and RMB31 billion of offshore debt.

The report also says that the negative outlook Moody's had first assigned to China's property sector in April 2011 remains in effect because of an anticipated continued weakening in the sector's fundamentals over the next 12 months.

Such a situation will further pressure cash flows and balance-sheet liquidity. Meanwhile, with onshore and offshore credit to the sector still tight, Moody's does not therefore see any likelihood of improvement over the near term.