It’s not just Evergrande that’s under financial duress. A growing number of Chinese property developers now face liquidity crunches and are seeking to sell assets to repay loans as it becomes increasingly clear that Beijing will not directly come to their financial rescue.
Hong Kong-listed Sinic Holdings, a Jiangxi-based property developer, saw trading in its shares halted on September 20 after the company failed to pay 100 million yuan (US$15.5 million) in project development expenses. Sinic is now reportedly trying to sell assets before $250 million worth of bonds mature on October 18.
On September 26, Huizhou Guang Group, once among China’s top 100 property developers, was declared bankrupt by a court because it failed to implement a proposed debt-restructuring plan. Its total debt amounted to more than 20 billion yuan. Company chairman and founder Guo Yaoming fled the country and is now wanted.
Developer Sunac China recently rang market alarms when a reputed internal memo addressed to eastern Shaoxing authorities seeking undisclosed “special policy support” was circulated on social media and referenced in media reports. It has since claimed the memo was a fake and that it is financially sound, though questions remain.
The People’s Bank of China, the central bank, is trying to ally market concerns. At a meeting attended by PBOC governor Yi Gang on Wednesday, authorities called on financial institutions “to jointly maintain the steady and healthy development of the real estate market and safeguard the legitimate rights and interests of housing consumers.”
The meeting, attended by banking and securities regulatory agency officials, the housing ministry and executives from 24 banks, also called for “accurately grasping and enforcing the prudential management system of real estate finance around the goal of ‘stabilizing land prices, house prices and expectations,’” a PBOC statement said.
It was the latest sign that authorities are seeking to stabilize the fast cooling housing market and contain fallout being caused by Evergrande’s debt crisis without resorting to bailouts.
On September 24, Evergrande failed to pay interest of US$83.5 million to global investors who held its bonds. The company has a 30-day grace period to make payment before any default is officially reported. On October 12, the company will have to pay $148.1 million in interest to its bond investors.
On Wednesday, the company announced it would sell off a US$1.5 billion stake in Shengjing Bank to Shenyang Shengjing Finance Investment Group, a state-owned asset management firm. Upon completion of the disposal, Evergrande will still hold 14.57% of the issued share capital of Shengjing Bank but lose a controlling stake.
Evergrande’s shares closed down 3.9% at HK$2.95 (37.9 US cents) on Thursday after jumping 16.5% on the asset disposal news on Wednesday. Shares of most Chinese property developers rose on Thursday, likely on the news of the PBOC’s statement, which was issued late on Wednesday after markets closed.
Shares of Sunac rose 12.8% to HK$16.6 while R&F Properties surged 17.3% to HK$5.98 on Thursday. Ronshine China increased 8.7% to HK$3.89 while China Jinmao gained 7.3% to HK$2.8.
Last Friday, Sunac’s shares slumped 9.2% to HK$12.96, the lowest level since June 2017, on the reputed leaked internal memo.
In the letter, Sunac said it was the largest property developer in Shaoxing by investment size but was now facing a huge liquidity crunch with some of its local projects in financial turmoil. The company reputedly urged the local government to loosen its property measures so that it could complete the online sales of 600 apartments involving one billion yuan.
On Monday, Sunac said in a statement that the document was a draft for its management to verbally report to the Shaoxing government but was mistakenly sent to a chat group. It said it had never intended to send the letter to the government while its financial situation remained healthy with a 33% year-on-year growth in its contract sales during the first eight months of this year.
The episode has raised new questions about transparency at property developers.
“In recent weeks, global markets have been spooked by the debt troubles of China’s largest property developer, Evergrande Group, with investors considering the macro implications of a default,” said Pearly Yap, a portfolio manager at Eastspring Investments. “The effects of the collapse of any given property developer are hard to quantify, let alone one as big as Evergrande.”
However, Yap said the Chinese government was fully prepared to handle arising challenges as it had engineered the cooling of the property sector to keep the financial system stable since last year.
“There are a select few large developers who have aggressively grown their balance sheets to fund growth in a loose credit environment,” she said. “But once the dust settles, the Chinese property sector is set to emerge healthier, and developers with solid balance sheets should be better positioned to gain market share.”
Lung Siufung, a property analyst at CCB International Securities Limited, said, “On the assumption a resolution to the Evergrande issue is close at hand, we see short-term trading opportunities for property managers and property developers such as Country Garden Services, Powerlong, China Resources Mixc, Sunac, Shimao and KWG.”
“That said, the medium-to-long term investment case for developers remains unconvincing to us given the backdrop of deteriorating fundamentals and policy initiatives aimed at decoupling the property industry and overall economy,” Lung added.
On Monday, Sinic Holdings failed to pay 100 million yuan of development expenses in a Suzhou project while its business partner had temporarily paid for them, according to a report published by ThePaper.cn. Sinic chairman Zhang Yuanlin is also seeking to sell company assets in different cities before a $250 million bond matures on October 18.
Sinic’s share were trading at around HK$4 for years but suddenly dropped 87% to 50 HK cents on September 20. Regulators have since suspended trading of its shares. Prior to that, mainland media said the company had announced it would slash senior executives’ salaries by 50 to 70%.
On Sunday, Guangdong Huizhou Intermediate People’s Court declared the bankruptcy of Huizhou Guang Group, which was founded in 2002 but had faced financial difficulties since 2014. The company had been among the top 100 property developers in China between 2011 and 2013 with annual contract sales of about 8 billion yuan.
In December 2017, Huizhou launched a debt-restructuring scheme in a bid to repay 21.2 billion yuan of loans to 1,100 creditors. The company later failed to implement the scheme. Last year, the group’s chairman Guo Yaoming was wanted by a Dongguan court for money owed.