Kaisa Group's collapse - an isolated case or China's property bubble cracking?

[HONG KONG] Who'd be an investor in China property bonds right now? Only those with an iron stomach for risk.

The plot is thickening in Shenzhen, the fishing-village- turned-metropolis that borders Hong Kong.

Authorities there restricted sales by local developer Kaisa Group late last year because of "irregularities." Within weeks, the company showed signs of imploding. Its bonds collapsed, the stock fell 47 per cent in December and was suspended, top executives left, the company failed to repay a loan and a bond coupon payment was missed. Credit analysts said they had no one left to call at Kaisa.

An isolated case or an early sign of the cracking of China's debt-fueled property bubble? The initial consensus was the former, to judge from the lack of contagion in dollar bonds of other Chinese developers.

That thesis gained some support when the news emerged that Kaisa was being probed over links to a senior official in Shenzhen who's under investigation. So, case closed: Kaisa got in with the wrong people and fell foul of President Xi Jinping's anti-corruption campaign, which has pledged to take down "tigers and flies," in other words both big hitters and the small fry.

(Kaisa, even with US$2.4 billion of net debt, is no tiger - probably somewhere between an arthropod and a domestic cat.)

That was then. Shenzhen has since said that it blocked sales at a series of other developers including Fantasia and -shock- state-owned China Overseas Land & Investment, whose shares fell as much as 6.9 per cent on Friday. It turns out political risk is catching.

How the Shenzhen situation pans out is of keen interest to global investors, as Bloomberg News reports today, with BlackRock Inc, JPMorgan Chase & Co and Fidelity Investment among money managers who have bought Kaisa bonds.

For now, investors can only ponder why the government chooses to spook overseas investors at a time of fragility, and how much further it's prepared to go. To compound the confusion, Shenzhen yesterday became the first city to record an increase in new-home prices for four months in December. (Were they getting ahead of themselves?)

The Shenzhen government now says its restrictions have been over-interpreted: the city government attempted to ease concerns on Friday, saying that blocked sales for China Overseas and another company were part of "normal processing" and didn't imply wrongdoing by the developers.

We suspected as much. If China Overseas Land is really in trouble, then it's time to stockpile baked beans, get out the wood-burning stove and dust off our copy of The Coming Collapse of China.

This is no Kaisa or Fantasia. China Overseas is a US$25 billion state behemoth controlled by the construction ministry in Beijing. If China Overseas can be targeted, then anything's possible.

Then again, this anti-corruption campaign is clearly taking no prisoners (or taking rather a lot, as the case may be). In a world where the nephew of 'Mr Macau' Stanley Ho can be marched out of his casino in a black hood and handcuffs, is anyone safe?

BLOOMBERG