Whether one sees a healthy and unavoidable development or reads a doomsday message into the defaults that are springing up among Chinese corporations, it seems clear that more will go belly up in 2014 and the distress could spread to some of China’s most sensitive sectors.
Enter the collapse of the small real estate developer.
Zhejiang Xingrun Real Estate will likely default on US$564.9 million (RMB3.5 billion) in renminbi-denominated debt that it owes to some 15 banks, according to media reports. Authorities have reportedly detained executives at the Ningbo-based firm for illegal fundraising. The collapse would be the latest in a string of potential defaults that started in January, and a sign of things to come for small property developers in lower-tier cities in China.
China Trust Company nearly defaulted on an US$80 million trust product in January before a mystery investor bought the worthless paper, bailing out some 340 wealthy investors. Other trust products have since defaulted. On March 7, Shanghai Chaori Solar Energy Science & Technology defaulted on an US$14.7 million bond payment, China’s first onshore corporate default since 1997. A private Shanxi province-based solar firm followed last week.
Xingrun’s collapse may not make corporate defaults a trend just yet. However, the missed payment at Chaori – which embarrassingly happened during the National People’s Congress – was an implicit green light from top policymakers to let some firms succumb to their financial woes. Just a year ago, local governments routinely jumped in to save their pet firms – and their faces.
The spotlight was already on the US$420 billion in interest and principle that Chinese corporations must repay this year. The Xingrun default will narrow that beam onto its peers, namely small, private property developers that operate in third- and fourth-tier cities.
Xingrun is based in Fenghua, a town that belongs to the city of Ningbo. Real estate in that region struggled in 2013 due to a high rate of over-supply. In neighboring Wenzhou city, year-on-year prices have fallen for nearly a year. Month-on-month prices fell in three other cities in February and nine of the 70 cities polled by the National Bureau of Statistics had stopped monthly growth last month. As prices begin to slow in third- and fourth-tier cities, small, highly leveraged developers in towns like Fenghua will find it increasingly hard to roll over loans.
The bottom line is that the market should expect more defaults among these developers this year.
They have already spooked investors. Property shares on the mainland stock market have tumbled, and people are asking if the distress will spread to bigger property developers in what could look like the popping of the Chinese real estate bubble.
Those worries are overblown. The large developers that are listed overseas, particularly in Hong Kong, have much better access to finance than the small, private firms that are now struggling to get access to credit. Many big developers have issued bonds in the Hong Kong market as opposed to getting expensive funding via shadow banks on the mainland.
Questions have been raised as to whether the depreciation of the yuan will hinder those companies’ ability to repay US-denominated debt in the future. However, even with the falling value of the yuan, it could still be more expensive to borrow from shadow banks on the mainland.
“They want to use offshore debt to replace onshore debt, which has a very high cost,” Andy Chang, associate director at Fitch Ratings in Hong Kong, said on Wednesday. “So, based on market appreciation in 2013 and the beginning of 2014, if you borrow from the offshore bond market, basically the interest difference from your onshore shadow banking could be around 2-3%. So this leaves quite a bit of room to compensate the depreciation of Chinese yuan.”
Bigger developers could even swoop in and buy up some of the better assets at small firms. Prime real estate in small but rapidly developing cities and towns could become acquisition targets should the private owners struggle, Chang said.
In the case of Xingrun, local demand in the town regrettably might not be enough to persuade any bigger players to step in and take over.
You must log in to post a comment.