Dismantling a Chinese developer could get ugly

Beijing

TEARING down a house is straightforward. Dismantling the company that built it is anything but. Chinese developer Kaisa, which has defaulted on a HK$400 million (S$69 million) bank loan, is heading inexorably towards a debt restructuring that could expose the flimsy structures on which foreign investors rely. The real estate group on Jan 7 denied reports that its board has decided to wind up the company. Yet some kind of reorganisation may be hard to avoid. The company has warned that its failure to pay back lender HSBC on time may lead to other automatic defaults. Some of Kaisa's partners have already cancelled ventures and demanded refunds. The local government in its home town of Shenzhen has mysteriously blocked the sale of certain projects.

Property developers can't survive without confidence. Customers, governments, suppliers and partners all sign long-term agreements that only work if the builder sticks around to honour them. The departure of Kaisa's chairman on health grounds in December - just after his family sold an 11 per cent stake - puts it at a distinct disadvantage. Lenders are likely to demand more collateral, higher yields and lower leverage.