5 min read.Updated: 19 Jan 2015, 12:54 AM ISTBloomberg
Missed payment may signal deeper risks for China's already fragile and corruption-prone property market
As Europe grapples with terrorism and Switzerland scrapped a currency peg, the troubles of a Chinese developer that’s never reached $3 billion in market value became something investors from New York to London couldn’t ignore.
A missed $23 million interest payment by Kaisa Group Holdings Ltd earlier this month puts it at risk of being the first Chinese real estate company to default on its dollar-denominated bonds. That may signal deeper risks for China’s already fragile and corruption-prone property market, which according to World Bank estimates accounts for about 16% of economic growth.
Chinese companies comprised 62% of all US dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion of the $392.5 billion total, Bloomberg data shows. BlackRock Inc., the world’s biggest asset manager, owned Kaisa’s 8.875% securities due 2018 and the ones the subject of the missed coupon payment, the 10.25% 2020s, its latest filing on Jan. 14 shows. Funds managed by JPMorgan Chase and Co., Fidelity Investment and ING Investment Management also held some of Kaisa’s debt at the end of October, according to filings.
Kaisa’s woes began late last year when the government in Shenzhen, less than 25km from Hong Kong, blocked approvals of its property sales and new projects in the city. It’s also being probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen who was taken into custody as part of a graft probe, two people familiar with the matter said last week, asking not to be named because the connection hasn’t been made public.
Kaisa missed an interest payment due on 8 January on its $500 million of 2020 bonds. The notes were sold to investors at par, or 100 cents on the dollar, in January 2013. In December, when some of Kaisa’s projects were blocked and key executives quit, the debentures lost 40.1%. They continued to fall in January, slumping to 29.901 cents on the dollar on 7 January, a record low, however have since recovered to trade at about 34.6 cents.
Concern is mounting that increasing financial stress among builders could spill over into a broader credit crisis in China. New-home prices fell in 65 of the 70 cities monitored in December and were unchanged in four, the National Bureau of Statistics said in a statement yesterday. Shenzhen recorded higher prices, the first city to see an increase in four months.
Borrowing costs for many developers in the world’s second largest economy have surged since Kaisa’s travails began. Yields on Chinese dollar-denominated speculative grade debt climbed to 12.38% on 16 January, a Bank of America Merrill Lynch index shows, the highest since June 2012. The junk debt has lost 5.7% in 2015, the worst start to a year on record.
Some of Kaisa’s Chinese creditors, meanwhile, have asked a court to freeze the company’s assets. In a statement on 9 January, the developer said that “several bank accounts of the group" had been frozen.
It’s a reminder of the risks overseas bondholders face when Chinese companies run into trouble. China’s bankruptcy laws favour local creditors while offering fewer protections to foreign debt claims. Kaisa has a 30-day grace period to make its missed payment.
A bigger concern for global investors may be the hurt inflicted on the property market by President Xi Jinping’s effort to uproot government corruption. Bribery scandals have rocked the sector in the past and the prospect other developers may be targeted has hit bond and share prices almost unanimously.
“It’s definitely a concern among investors" that similar events could happen to other Chinese developers, said Alan Jin, a Hong Kong-based analyst at Mizuho Securities Co. Emerging funding difficulties in offshore markets may have an impact on the industry’s recovery, he said.
Inspectors sent by the central government found property related corruption cases, including misbehaviour by officials in land auctions and property development, in all but one of the 21 provinces they inspected since 2013, the official Xinhua News Agency reported on 13 October, citing the ruling party’s disciplinary body.
Jiang Zunyu was named the target of a graft probe in October, according to Xinhua. Jiang was previously head of Longgang district, the people who spoke on condition of anonymity said. According to company filings, some approval procedures for Kaisa projects in Longgang were suspended last month.
The Shenzhen city government’s media department referred questions on 13 January and a request for contact information for Jiang or a legal representative to its foreign media office, which didn’t answer three phone calls.
Stock moves on 16 January showed how jittery the markets have become. China Overseas Land and Investment Ltd fell as much as 6.9% after the Shenzhen government blocked some sales for unspecified reasons. China Overseas Land later said in a company statement that all the blocked units had been sold and the move won’t affect its business or finances. The Shenzhen government also issued a statement saying the restrictions were for “normal processing". Its shares closed down 2.8%.
Fantasia Holdings Group Co. dropped as much as 3.7% while Guangzhou R&F slid as much as 4.9%. The benchmark Hang Seng Index closed down 1%.
Agile Property’s shares plunged 17% in Hong Kong on 13 October after the company disclosed on 10 October that its billionaire chairman was put under control of prosecutors in September before being released last month. The company didn’t detail the nature of the detention. In August, Shenzhen-based Hydoo removed its chairman after losing contact with him for two weeks only to learn he was assisting Chinese authorities in an investigation.
A Shenzhen government website posted an announcement on 15 January that four apartments owned by Fantasia in the city had been given “restricted" status. The website didn’t indicate when the status on the properties changed. That same day, Fantasia issued an exchange filing saying it no longer owned the apartments and that its business operations were normal. Dollar bonds of Fantasia fell to record lows.
Kaisa didn’t respond to requests for comment about its situation or its connection to Jiang Zunyu. Agile declined to comment and Hydoo also didn’t respond to emailed requests for comment.
Housing’s influence on China’s economy is pervasive, driving sales of everything from cement and steel to electrical appliances, furniture and cars. It’s contribution at home, and to global expansion, make it “the most important sector in the universe," Jonathan Anderson, the former chief economist for emerging markets at UBS Group AG who now runs Beijing-based Emerging Advisors Group, wrote in a 2011 research note. Property is the main risk for China’s economy, Ma Jun, the chief economist at the People’s Bank of China, said in October.