Cross posted from: https://beehaw.org/post/17809174
Archived version
One of China’s leading developers is now on the authorities’ radar for default risk. A major Hong Kong builder is asking lenders to extend loans. Another industry peer is selling an iconic but largely empty mall in Beijing.
As China’s property debt crisis enters its fifth year, there is little indication that distressed developers are finding it easier to repay debt as a slump in home sales continues. Their dollar bonds are still trading at deeply distressed levels, their debt issuance has nearly dried up, and the sector is a notable laggard in stock markets.
Alarm bells went off again in recent weeks, when the banking regulator told top insurers to report their financial exposure to China Vanke to assess how much support the country’s fourth-largest developer by sales needs to avoid default.
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"While recent government policies have helped to arrest the speed of decline, it could take another one or two years for the sector to bottom,” said senior credit analyst Leonard Law at Lucror Analytics.
“Against this backdrop, we can’t rule out the possibility of some more defaults next year, albeit the overall default rate should be much lower than before.”
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The [Chinese government's] rescue measures adopted so far have focused on preventing a collapse in property prices, protecting owners of unfinished apartments and using state funds to help absorb excess supply.
At the same time, policymakers chose to look on as former industry behemoths China Evergrande Group and Country Garden Holdings became defaulters.
This is why the banking regulator’s queries over insurance firms’ exposure to Vanke’s bonds and private debt have drawn much attention. The insurers conducted similar checks in March as fears grew over the builder’s repayment risks.
Separately, Vanke executives have visited several insurers in the past few weeks, urging them not to exercise put options on some private debt that will soon become open to them.
“If there is no turnaround in property sales, asset disposals remain slow in a weak property market, and financial institutions become more cautious and require additional collateral, we believe Vanke could see a liquidity shortage sooner than expected,” Jefferies Financial Group analysts, including Ms Shujin Chen, wrote in a note.
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Vanke’s dollar bond due May 2025 dropped about 10 US cents in the past week to around 80 US cents on the dollar, the biggest weekly decline in more than a year. Its 2027 note also slumped to 49 US cents, signalling investor doubts about full redemption.
Vanke’s woes come at a time when capital markets continue to show weak investor confidence in the sector: mainland Chinese and Hong Kong developers have issued US$67.3 billion (S$91.3 billion) of bonds in 2024, putting the market on track for its smallest annual issuance in at least in a decade.
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In another worrying development, distressed Hong Kong builder New World Development is asking banks to postpone the due dates of some bilateral loans, a move that deepens concerns over its ability to service one of the heaviest debt loads of its kind.
Controlled by the family empire of tycoon Henry Cheng, the developer had total liabilities of HK$220 billion (S$38.4 billion) at the end of June and recorded its first annual loss in two decades.
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"Hong Kong developers are facing a double-whammy in the current down cycle,” said Mr Daniel Fan, credit analyst at Bloomberg Intelligence.
“China’s property market, where many of them are involved, shows no sign of a strong recovery, while Hong Kong’s market correction is still ongoing.”