China’s real estate crisis deepens as big Shanghai developer defaults

Another Chinese developer has defaulted, causing a fresh blow to the struggling real estate sector in China’s second-largest economy.

According to a Hong Kong stock exchange filing, Shanghai-based Shimao Group did not pay interest or principal on a $1B bond due Sunday. According to the offering document, there was no grace period for the principal.

It’s the first debt payment on a dollar bond that Shimao has made. Shimao had been struggling with increasing financial stress for months.

Since 2020, China’s realty sector has been in turmoil from crisis to crisis. In an effort to curb excessive borrowing by developers and rein in high levels of debt, Beijing began to crack down on excess borrowing.

Last fall, the problems became more severe when Evergrande, China’s second-largest property developer, began to struggle to raise funds to repay creditors. With more than $300 billion in debts, the embattled company is China’s largest property developer. It was deemed a defaulter in December by Ratings.

Moody’s estimates from earlier this year indicate that Shimao Group will have a significant amount of debt due to maturity in 2022. These include $1.7 billion worth of bonds held by foreign investors, 8.9 million yuan ($1.4 trillion) bonds held by Chinese investors and “sizable offshore bank loans”.

Shimao was founded by Hui Wing Mau, an entrepreneur, in 2001. It develops large-scale residential and hotel projects across the country. It is the owner of Shanghai Shimao International Plaza, the highest skyscraper in Shanghai.

The company’s March 2021 net profit fell 62% compared to a year ago, due to the “harsh environment” facing the property sector. The lockdowns in Shanghai caused the company to delay the release of its 2021 results.

Shimao stated in a filing that the Group experienced a decline in contracted sales due to significant changes in China’s macro environment since the second half of 2021, and the impact of Covid-19.

According to the company, it had been working with creditors to find “amicable solutions” to its debts. Creditors could force the company’s accelerate repayments if there is no agreement.

A number of prominent developers have defaulted on their debts since Evergrande’s bankruptcy, including Fantasia and Kaisa.

Beijing’s zero-Covid policies and a slowing economy have exacerbated the industry’s problems. China put many of its major cities, including Shanghai, under tight lockdown in order to combat rising Covid cases. This severely impacted business activity.

The largest developer in China, Sunac China, based in Beijing, said last month that the Covid epidemic had “significantly” affected its sales in March and April, further aggravating its liquidity crunch. The developer also admitted that it had defaulted upon a dollar bond.

A survey done by China Index Academy, a property research company, showed that new home prices in 100 cities fell more than 40% between the same time last year and Friday.

Authorities are working to stop the bleeding. They have increased efforts to boost home sales by lowering mortgage interest rates and relaxing rules regarding home purchases. Developers have found creative ways to increase sales, from offering pigs to buyers as incentives to buy to accepting garlic or grain as a down payment.

Although signs are showing that June sales were less dramatic than in previous months, it is likely that the road to recovery in the property sector will be bumpy as Beijing continues to adhere to its zero-Covid policy, Nomura analysts said in a Monday note.
Evergrande is currently preparing a massive debt restructuring plan led by the government. The developer plans to present its proposals before the end of the month.

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