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Is China’s Property Debt Crisis Set to Worsen?

Barchart - Mon Sep 25, 10:41AM CDT

A multi-year downturn in China’s property market looks to continue as a raft of rescue measures from Chinese authorities have fallen flat.  Disappointing home sales in China’s largest cities suggest that policy support measures have failed to turn around buyer sentiment.  There are fears that China’s property debt crisis will next hit China’s commercial banks and keep home prices under pressure, further hurting consumer confidence.

New home sales in China for the first two weeks in September in China’s tier-one cities fell from August’s levels.  The fallout from the property crisis has now spread to investment-grade developers.  Moody’s Investors Service put China Jinmao Holdings Group Ltd and China Vanke Co on review for possible downgrade while lowering the outlook for seven other builders to negative.  Credit Insights said China’s property sector is facing a multi-year downturn and is even less optimistic about the country’s commercial property market. 

Efforts by the Chinese government to relax home-buying restrictions have ramped up, with 11 cities in China announcing such measures this month, according to China Index Holdings. Chinese developers are hoping for a home sales revival ahead of the Golden Week holidays that begins this Friday, one of the busiest seasons for homebuying.  However, optimism that the new measures will help is quickly fading as the crisis threatens to dampen sentiment among developers with relatively healthier balance sheets.

China’s property debt crisis took a turn for the worse after China Evergrande Group scrapped a creditor meeting on Sunday and said it must revisit its restructuring plan.  Also, China Oceanwide Holdings Ltd. disclosed it is facing liquidation after a Bermuda court issued a winding-up order against the company that involved a $175 million loan principal that wasn’t paid. In addition, concerns are growing that China Country Garden Holdings may suffer an imminent default after missing initial deadlines to pay dollar bond interest.

At the epicenter of China’s property crisis is China Evergrande Group, the second-largest property developer in China by sales.  The company is under pressure to restructure as it grapples with its mounting pile of total liabilities that amount to 2.39 trillion yuan ($327 billion), among the biggest of any property firm in the world.  The clock is ticking for Evergrande to finalize a plan for its offshore debt restructuring as the company faces an October 30 hearing at a Hong Kong court on a winding-up petition, which could potentially force it into liquidation.  The debt crisis in China looks to worsen as several other Chinese developers are contending with the same situation as Evergrande to restructure their debts, which potentially can force court-ordered liquidations. 

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.