China debt crisis snares state-aided developer; IMF warns of banking crisis
CHINA’S ability to contain a deepening property debt crisis has come under more scrutiny, after a private developer with state backing for funding joined an expanding list of bond defaulters.
CIFI Holdings Group Co failed to pay a coupon due Oct 8 on a Hong Kong dollar convertible bond. The Shanghai-based firm also warned it may face a similar outcome on offshore debt, after blaming a long Chinese public holiday for delaying payments.
The default is particularly worrying because CIFI was considered a barometer for the broader success of a new rescue effort by Beijing to use state guarantees to help a select group of developers access domestic funding. The builder’s payment struggles also serve as a reminder of the uphill battle that Chinese leaders face to revitalise a key economic engine, as they gear up for a major Communist Party congress starting in three days.
Charles Macgregor, head of Asia at Lucror Analytics, said: “It’s just another surprise for investors, who are becoming increasingly sceptical about any private developer. It’s really too late for the authorities to support the sector now.” He also said that confidence among homebuyers and creditors appeared “terminally eroded”.
Since a default in December by China Evergrande Group, the nation’s property industry has been hit by a record wave of bond failures fuelled by private developers with limited access to a banking sector dominated by state lenders.
CIFI’s latest payment setback has extended a selloff in the shares of Chinese developers, with a Bloomberg Intelligence gauge falling as much as 2.6 per cent on Thursday (Oct 13), and poised for its sixth-straight daily loss. China high-yield dollar notes, dominated by developers, also weakened, said traders, pushing a Bloomberg index back toward August’s record low.
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While the builder’s Hong Kong-listed shares plunged 12 per cent, those of Country Garden Holdings Co, China’s top developer by contracted sales, slumped 11 per cent in a sign of contagion to even bigger rivals. Country Garden’s 6.5 per cent dollar bond due 2024 was down 3.5 cents at 26.7 cents just before 6 pm in Hong Kong, according to Bloomberg-compiled prices, on pace for an all-time low.
The Shanghai-based builder of residential projects and shopping malls failed to deliver interest payment on a 6.95 per cent Hong Kong dollar convertible note originally due Oct 8, the bond’s trustee said in a notice dated Tuesday to Euroclear, one of the world’s top clearing houses. China Construction Bank (Asia) Corp, the trustee, said the payment miss constitutes an event of default.
CIFI didn’t respond to Bloomberg News’ request seeking comment. In a Thursday filing to the Hong Kong Stock Exchange, the company said it has experienced a delay in remittance of cash offshore to meet scheduled interest and amortisation payments due to the recent long public holiday in China.
The developer added that it has been proactively engaging with creditors to address the issue in a bid to reach consensual solutions, adding that its commercial operations remain normal. However, CIFI also warned that if it doesn’t meet its offshore debt obligations on time, or is unable to implement appropriate consensual solutions with creditors, “events of default may occur”.
Meanwhile, the International Monetary Fund this week painted a bleak picture of how China’s housing slump may morph into a banking crisis. In its global financial-stability report, its analysis showed that 45 per cent of developers might not be able to cover their debt obligations with earnings, and 20 per cent of them could become insolvent if their inventory value is marked to current property prices.
In one scenario, 15 per cent of small banks may go under, said the IMF. BLOOMBERG
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