Commentary on Political Economy

Monday 1 March 2021



China developer default marks latest test in under-pressure sector

China Evergrande, the world’s most indebted property company, is one of several developers Beijing is pressuring to reduce debts © Bloomberg

A Chinese property developer backed by the country’s largest insurance group has defaulted on a $530m bond in the latest test for the country’s debt-laden real estate sector and the international investors backing it.

The failure of China Fortune Land Development to repay the bond, investors in which include BlackRock and HSBC, comes against a backdrop of mounting pressure from Beijing on China’s biggest developers to reduce their debts. It follows a spate of corporate defaults late last year that sent shockwaves through the country’s $15tn onshore bond market.

In a statement to the Singapore stock exchange on Friday, the industrial park developer said the repayment, which was due on Sunday, would be delayed. It said it “intends to honour its debt obligations but needs time to address its short-term liquidity issues”.

China Fortune Land is 25 per cent owned by Ping An, China’s biggest insurance company, and has dollar-denominated debt totalling $4.6bn, according to data compiled by Bloomberg. In early February, it said it had missed payments of more than Rmb5.3bn ($820m) on onshore loans.

China Fortune Land’s $530m bond, which is now listed as defaulted on Bloomberg, was trading at deeply distressed levels of 52 cents on the dollar last week in Asia’s dollar-denominated high-yield bond market, where Chinese property developers are among the largest borrowers.

Fitch Ratings downgraded the company’s debt rating to CC from CCC in early February. It estimated China Fortune Land was owed around Rmb50bn in delayed payments from local governments for development of industrial parks. The property developer ranked 43rd by sales last year, according to Mingtiandi, an online real estate information service.

Those delays had compounded a difficulty in refinancing and an absence of support from Ping An, said Fitch analyst Chloe He. “The market price has dropped too much . . . they can’t refinance at the current yield,” she said.

Ping An, which said last month that it had total exposure of $8.4bn to the property developer, declined to comment on whether it was continuing to support China Fortune.

BlackRock and HSBC, which hold about $14m and $10m of the dollar-denominated bonds, respectively, declined to comment.

The Chinese government outlined a plan in August aimed at reducing leverage according to three metrics — the so-called three red lines. Analysts have suggested the guidelines are directly affecting primarily the 12 biggest developers.

“I think what happens is they [the government] want to test the policy with the 12 [largest] developers first and then they’ll decide . . . how can the policy be implemented consistently, with all the developers,” said He.

Prices of bonds and shares in China Evergrande, the world’s most indebted property company and China’s largest, swooned in September as it fought off fears of a crash crunch after a letter, which it denied, circulated that it had sought government aid.

Shares in China Fortune Land Development have fallen 34 per cent this year, but gained almost 20 per cent on Thursday and Friday as part of a broad sector rally on news of a new land sales programme in big cities.

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