(Bloomberg) — One of China’s leading developers is now on authorities’ radar over default risk. A major builder in Hong Kong is asking lenders to make loans. Another industry peer is selling an iconic but largely empty shopping center in Beijing.
Most read from Bloomberg
As China’s real estate debt crisis enters its fifth year, there is little evidence that distressed developers are finding it easier to repay their debts as the decline in home sales continues. Their dollar bonds are still trading at deeply troubling levels, their debt issuance has all but dried up, and the sector is a notable stock market laggard.
Alarm bells went off again in recent weeks when the banking regulator ordered top insurers to reduce their financial exposure to China Vanke Co. to assess how much support the country’s fourth-largest developer by sales needs to avoid bankruptcies. In Hong Kong, New World Development Co. tried. to postpone the maturity of a number of loans, while Parkview Group in Beijing put a historic commercial complex up for sale.
The latest signs of stress are adding to concerns that the worst is far from over for the housing sector in the world’s second-largest economy, once a powerful growth engine and now a major drag on demand for items from furniture to cars. And they are especially worrying because Vanke’s woes show that the liquidity crisis is hitting one of the few major builders that have so far managed to avoid bankruptcy. Meanwhile, the problems faced by his colleagues in Hong Kong mean the contagion is increasingly felt offshore.
“While recent government policies have helped stem the pace of the decline, it may take another year or two for the sector to bottom out,” said Leonard Law, senior credit analyst at Lucror Analytics. “Against this backdrop, we cannot rule out the possibility of further defaults next year, even though the overall default rate should be much lower than before.”
Chinese authorities have stepped up efforts in recent years to ease the unprecedented slowdown in the country’s housing market, including interest rate cuts, curbs on purchasing costs and restrictions, as well as government guarantees for bond sales by stronger developers. Top leaders also pledged to stabilize the real estate market next year at a key economic meeting earlier this month.
However, the rescue measures taken so far have focused on preventing a collapse in property prices, protecting owners of unfinished apartments and using sovereign wealth funds to help absorb excess supply. At the same time, policymakers chose to watch as former industry giants China Evergrande Group and Country Garden Holdings Co. were in default.
This is why the banking regulator’s questions about insurance companies’ exposure to Vanke’s bonds and private debt have attracted a lot of attention. Insurers carried out similar checks in March as fears grew over the builder’s reimbursement risks. In addition, Vanke executives have visited several insurers in recent weeks, urging them not to exercise put options on private debt that will soon be open to them.
“If there is no turnaround in real estate sales, asset sales remain slow in a weak real estate market and financial institutions become more cautious and require additional collateral, we believe Vanke could face a liquidity crunch sooner than expected,” say analysts at Jefferies Financial Group Inc. including Shujin Chen wrote in a note. “We still estimate the chance of a government bailout at less than 50%.”
Vanke’s dollar bond due May 2025 fell about 10 cents last week to about 80 cents on the dollar, the biggest weekly drop in more than a year. The 2027 note also fell to 49 cents, indicating investors are questioning full redemption.
Vanke’s troubles come at a time when capital markets continue to show weak investor confidence in the sector: developers in mainland China and Hong Kong have issued $67.3 billion in bonds this year, putting the market on track for its smallest annual issuance in at least ten years. This is evident from data compiled by Bloomberg. Meanwhile, a Bloomberg stock index of Chinese builders is up 3.7% this year, versus 24% for a broader index tracking the country’s Hong Kong-listed companies.
In another worrying development, ailing Hong Kong builder New World Development is asking banks to postpone the due dates of some bilateral loans, a move that heightens concerns about the country’s ability to handle one of the heaviest debt burdens in its kind of repayment. Controlled by tycoon Henry Cheng’s family empire, the developer had total assets of HK$220 billion ($28.3 billion) at the end of June and posted its first annual loss in two decades.
The New World Development debt struggle is an ominous sign that China’s real estate problems are spreading abroad. According to its 2024 annual report, the builder derived 73% of its real estate development and investment revenue from mainland China.
WATCH: A look inside China’s real estate crisis
Some perpetual notes from the developer of projects including the K11 Art Mall in Hong Kong’s Tsim Sha Tsui shopping district recently fell to a record low of around 30 cents. Shares are down 57% this year.
Meanwhile, Parkview Group, a Hong Kong-based high-end developer whose founding family is from Taiwan, is looking for buyers for an iconic commercial complex in Beijing’s central business district as it struggles with high loan servicing costs and low occupancy rate. A Chinese state-owned company is said to be interested in purchasing the property, which is known for its unique pyramid-shaped structure and includes a shopping mall, hotel, office towers and an arts center.
“Hong Kong developers are facing a double whammy in the current down cycle,” said Daniel Fan, credit analyst at Bloomberg Intelligence. “The Chinese real estate market, in which many of them are involved, shows no sign of a strong recovery, while the market correction in Hong Kong is still underway.”
–With help from John Cheng, Jing Jin and Apple Ka Ying Li.
Most read from Bloomberg Businessweek
©2024 BloombergLP
