China asks state-owned developers to avoid public debt defaults
Most of the biggest private developers have defaulted since 2021, shattering confidence in the housing market
CHINA has introduced a requirement for state-owned developers to avoid defaulting on publicly issued debt, in the latest attempt by authorities to contain the nation’s prolonged property crisis.
The State-owned Assets Supervision and Administration Commission (Sasac) added the directive to its latest performance metrics for about 20 developers that are controlled by the central government, people with knowledge of the matter said, asking not to be identified discussing a private matter.
While the regulator has so far stopped short of providing additional support to backstop the developers, the new stipulation underscores growing urgency to contain credit risks from China’s protracted property downturn.
Most of the biggest private developers have defaulted since 2021, shattering confidence in the housing market and leaving a pile of distressed debt that currently stands at almost US$140 billion.
So far, state-owned developers have avoided the same fate, and their onshore bonds are trading at levels that suggest bondholders expect repayment.
The companies overseen by Sasac range from leading firm Poly Developments & Holdings Group to smaller builder CCCG Real Estate.
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Sasac sets financial indicators for state-owned enterprises such as total profit and the ratio of debts to assets.
While there is no guaranteed way to prevent state-owned enterprises (SOEs) from defaulting without higher-level intervention, the requirements are designed to ensure officials at the helm remain accountable for performance.
China Vanke, a major developer, received state support in January, although that was led by local authorities in the company’s hometown of Shenzhen. Vanke, which is backed by a local SOE, is not considered a central government-controlled developer.
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China’s housing slump has dragged on for four years, with little sign of improvement. Prices of new homes slid the most in seven months in May, and sales also fell, signalling the effects of a stimulus blitz last September is wearing off.
Like their privately owned peers, SOE developers have felt pressure from slumping sales. Last year, some resorted to steep price cuts to rekindle transactions.
“China’s state-owned and private developers are both susceptible to a possible renewed property sales downturn,” Bloomberg Intelligence analyst Kristy Hung wrote in a recent note. She warned that state-owned builders face the risk of a full-year decline in sales this year.
Central government-owned developers mostly rely on domestic financing, and the majority of their onshore bonds trade near or at par. Poly’s 3.17 per cent yuan bond due next year even traded above par last week.
But when considering those owned by local governments, yields of yuan bonds of state developers were the highest among 32 sectors, standing above 2.2 per cent in May, according to a note by China International Capital Corp.
Some smaller firms are struggling. CCCG Real Estate, which operates under a state-owned infrastructure enterprise, has been on the brink of delisting from the Shenzhen stock exchange since April. It is the first listed state builder to be warned by the exchange for such risk.
CCCG Real Estate expanded quickly in the three years since 2019, when it made a bold target to triple sales. Later, it booked two straight years of losses that left it with negative net equity, breaching the bourse’s listing rules. To avoid delisting, it agreed to sell its entire real estate business to its parent firm for one yuan (S$0.18), according to an exchange filing on Jun 16.
Still, all of CCCG Real Estate’s 5 yuan bonds were trading above 98 yuan last week, Bloomberg-compiled data showed.
Chinese Premier Li Qiang earlier this month pledged action to stop the decline in the real estate market, which has been depressing household sentiment just as the government is trying to boost consumption and offset the threat to exports from US tariffs.
Even if China’s housing market picks up, the long-term outlook remains grim. Demand for new homes in cities is expected to stay at 75 per cent below its 2017 peak in the coming years, due in part to a shrinking population, Goldman Sachs Group estimated.
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