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China’s real estate faces endless crisis

Credit stress and meager sales continue to threaten Chinese property groups. Zhengrong Real Estate announced that it could not fulfill its debt repayment obligations.

According to a filing with the Hong Kong stock exchange, Chinese real estate developer Zhengrong Property Group has determined that the company’s current resources are insufficient to meet customer demand, Bloomberg reported. Debt repayment obligations. during the current period. next month.

The Shanghai-based company is in talks with its creditors to propose some waivers and amendments aimed at improving the company’s overall financial health. According to the 2021 sales contract, Zhengrong is the 30th largest construction company in China.

Due to limited internal capital, Zhengrong faces a series of debts until March 2022, including a full share repurchase on March 5.

Objectives that threaten economic stability
The stock price of Zhengrong fell by as much as 81%, bringing many risks to margin operations. Chinese property stocks fell 3.4%, their 12th straight monthly decline of 28%. China’s Bloomberg Dollar Debt Index has continued to fall over time, yielding more than 20%.

Faced with slumping sales and the inability to refinance loans, many property developers in China are opening the door to repayments. The industry saw a record number of defaults last year after China tightened regulations on excessive borrowing.

Entrepreneur Yu Liang – chairman of Vanke, one of China’s largest property developers – even urged employees to prepare for the company’s battle for survival.

In addition to the tight capital of construction companies, the downturn in the property market has also become one of the main factors dragging down China’s economy. Losing control of speculative markets could threaten Beijing’s commitment to prioritizing economic stability this year.

Chinese authorities are adjusting some regulations to create a soft landing for the real estate industry, such as encouraging mergers and acquisitions. However, regulators still limited the introduction of easing measures.

“Despite the increased government support, measures are still limited and have not resolved the liquidity crisis. Volatility and uncertainty in the Chinese market have prompted traditional investors to wait and see,” said Paul Lukaszewski, head of corporate debt in Asia Pacific at Abrdn Investments. .

CFLD became the first real estate company to default on a $530 million bond since Beijing set new financial limits for the real estate industry in 2020. February 2021.

The Standard Chartered report also showed that at least 11 other companies in China have joined CFLD. China Evergrande, China’s leading real estate group, is also facing a lengthy restructuring process after it declared bankruptcy in December.

$100 billion needed to pay off debt
Real estate companies will need $100 billion to repay loans this year, despite falling earnings, according to preliminary data from the China Real Estate Information Administration. Sales at China’s 100 largest developers fell about 40% year-on-year in January, compared with a 35% drop in December.

Developers are selling more domestic bonds to fund project construction, but not enough to pay maturing debts.

Domestic bond issuance fell 53% to $3.6 billion in January, while dollar cash conversion sales fell 90% year over year to just $1.6 billion. Analysts at CICC, led by Zhang Yu, said net financing was negative $7.3 billion after deducting the issuance period.

In addition, investors face off-balance sheet debt. Shimao Group Holdings recently proposed to defer repayments to August on about $943.6 million in high-yield trust products due this month. Corporate bonds fell rapidly amid concerns that Shimao was prioritizing these debts over foreign creditors.

The future of bondholders remains unclear, although Chinese authorities have asked state-owned bad-loan managers to participate in restructuring vulnerable units. Court-led restructurings are relatively rare in China’s real estate industry. As of 2018, only 2 of the 27 companies that had failed to pay their bonds were involved in the restructuring process.

“Even the recent resurgence in new home lending is not helping to ease sluggish market sentiment,” said Dirk Willer, an analyst at Citigroup.

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