Share and bond prices for China’s leading property companies fell sharply today following reports that a Ningbo real estate developer had collapsed, leaving behind RMB 3.5 billion in debt and more than 100 unhappy creditors.
The folding of the developer, Zhejiang Xingrun Real Estate Co, which owed more than RMB 1 billion to China Construction Bank Corp (HKG:0939) and at least 15 other banks, has left many investors fearful of a contagion of real estate company failures.
On March 7th, Shanghai Chaori Solar became the first Chinese company to default on a corporate bond when it was unable to cover a RMB 89.8 million interest payment to creditors. Since that time, investors have been punishing the stock prices and bond offerings of China’s heavily leveraged property industry, especially as slowing housing prices and higher land prices put additional financial pressure on developers.
Developer Stocks and Bonds Fall Regionally
The first reports of Zhejiang Xingrun’s fate were published last night, and the region’s financial market reacted quickly this morning by sending developer stock prices downward.
China Vanke (SHE:200002), the nation’s biggest developer by sales was down 0.71 percent on the Shenzhen Exchange, while number two mainland-listed company Poly Real Estate (SHA:600048) was down 2.82 percent in Shanghai, with another leading Shanghai-listed developer, Gemdale Corporation (SHA:600383), sliding 0.79 percent.
In Hong Kong, the Hang Seng Property Index fell more than 315 points in early trading to lose 1.2 percent of its value before recovering late in the day to close down 16.53 points (.06 percent). China Overseas Land (HKG:0688), the largest Chinese developer listed in Hong Kong by market capitalisation, was down 1.62 percent for the day, after falling much lower in early trading.
On the bond markets, China’s fourth-largest developer, Evergrande Real Estate (HKG:3333), saw its 8.75 percent notes due in 2018 fall one cent on the dollar today, pushing the yield to 10.562 percent, according to Bloomberg. The renewed market skepticism regarding Evergrande’s debt comes less than two months after the company had renegotiated some of its debt to allow itself to take on further leverage.
Collapse Follows Earlier Warnings
The failure of the Ningbo-based private developer follows a series of increasingly shrill warnings regarding the risks to China’s real estate industry caused by the market slow down and what are often seen as reckless borrowing practices.
Reports earlier this month from credit agencies Standard & Poor’s and Moody’s pointed to risks from slower sales and rising land prices as adding to the likelihood of defaults in the real estate industry this year. The reports even pointed out a few high risk companies, such as Hopson Development, Coastal Greenland and Glorious Property as having particularly high chances of failure.
Pressures to Continue and Further Defaults May Be on Way
With the central government seemingly determined to contain housing prices, and land prices continuing to rise, developers in China are likely to continue to face compressing margins and poential shortfalls this year.
This difficult situation for the real estate companies will encourage lenders to keep their money in their pockets will create situations where other over-extended developers like Zhejiang Xingrun may be finding their names in Mingtiandi for all the wrong reasons.