A Chinese developer’s repeated extensions on debt repayments despite state backing show the limitations of government help, just as authorities ramp up support for the beleaguered real estate sector.

Shenzhen-based China South City is partially owned by the Shenzhen SEZ Construction and Development Group, a unit of the southern Chinese city’s local state asset regulator. It was among the first in China’s property sector to receive a state bailout. The Shenzhen state-owned firm bought a 29 per cent stake in the developer in May 2022. 

Now the company is soliciting consent from bondholders to extend the maturity and lower the interest rates of five dollar notes due in 2024, all of which were issued as a result of earlier bond extensions. 

“The company appeared to have low willingness to service its offshore dollar bonds in full and on time, despite having obtained additional low cost funding from onshore banks backed from its state-owned parent,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore. 

The developer’s extension comes despite the bond’s keepwell clauses provided by the Shenzhen state asset regulator affiliate. Keepwell provisions are a sort of gentleman’s agreement that entails a commitment to maintain an issuer’s solvency, but stop short of a payment guarantee from the parent company.

During a call with investors on Monday afternoon, a representative from Shenzhen SEZ Construction and Development emphasised that a keepwell agreement is not equivalent to a guarantee, people who dialled into the meeting told Bloomberg, asking not to be identified as they are not authorised to speak, and the matter is private.

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Separately, an ad-hoc group of China South City’s bondholders said they plan to reject the company’s proposal to further extend the bonds, according to people familiar with the matter.

A representative for China South City didn’t immediately have comment when reached by Bloomberg.

Authorities’ measures to put a floor under a three-year slump in China’s property sector have disappointed so far. Even Country Garden Holdings, once the country’s largest builder by contracted sales, has defaulted on a dollar bond. The International Money Fund warned earlier this year that the trouble could spill over into the financial industry and local government if confidence is not restored.   

“Not all state-linked developers are the same; and only the large ones with more systemic importance would receive debt servicing-related support from the Chinese governments,” Zeng said. “It is not rare to see Chinese state-owned enterprises refuse to honour their keepwell deeds, and we won’t be surprised if Shenzhen SEZ tries to evade the full liability of the keepwell and push for a second restructuring of the company’s dollar bonds.” BLOOMBERG