eTradingPicks
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Believe it or not, by the time this editorial is published, the world will have less than seven hours to find out whether China’s real estate bubble will burst or not. The story is now nine days old, when on December 31st, 2014, Kaisa Real Estate Holdings Ltd, a Chinese developer listed in Hong Kong, defaulted on its HK$400 million loan from HSBC Holdings Plc. And today, the company has until midnight to pay interest to its US $500 million debentures holders maturing in 2020.
The interest value amounting to US$ 26 million is not a big deal, however, bearing in mind that it constitutes exactly half the defaulted HSBC loan value, surely puts a lot of question marks on the company’s commitments. Furthermore, failure to meet its bond obligation would be the first of its kind for a Chinese developer in international markets, and could definitely trigger a lot more in the short to medium term.
In recent years, the Chinese government had removed all constraints for its real estate developers. As a result, the sector boomed and supply largely surpassed demand bringing real estate prices down almost 4% in 2014 compared to the previous year in all of China’s major cities. In addition, the country’s housing inventory has been building up that it now needs a whole year to get rid of it. Now with the bubble about to explode, experts are observing its implications on China’s US$ 55 billion real estate bonds sold in the international market.
Kaisa’s Chairman, Kwok Ying Shing, its CFO, Cheung Hung Kwong, have both resigned in December 2014 along three other board members leaving the company in total despair. Furthermore, following its recent HSBC default, two Kaisa partners in redevelopment projects have terminated cooperation with the company and now demand the immediate refund of US$193 million. Surprisingly, in the six months ending June 2014, the company was sitting on a US$ 1.5 billion in cash, which raises the possibility that Kaisa could be the Chinese version of Enron.
If indeed the company defaults on its bond six hours from now, international bondholders will have to report it in the Cayman Islands where almost all foreign Chinese bonds are registered through offshore companies. A move, which if taken, could spill over all other Chinese real estate bonds and make matters much worse for global economies. A second editorial would surely follow up at midnight, but meanwhile, hold your breath!
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The interest value amounting to US$ 26 million is not a big deal, however, bearing in mind that it constitutes exactly half the defaulted HSBC loan value, surely puts a lot of question marks on the company’s commitments. Furthermore, failure to meet its bond obligation would be the first of its kind for a Chinese developer in international markets, and could definitely trigger a lot more in the short to medium term.
In recent years, the Chinese government had removed all constraints for its real estate developers. As a result, the sector boomed and supply largely surpassed demand bringing real estate prices down almost 4% in 2014 compared to the previous year in all of China’s major cities. In addition, the country’s housing inventory has been building up that it now needs a whole year to get rid of it. Now with the bubble about to explode, experts are observing its implications on China’s US$ 55 billion real estate bonds sold in the international market.
Kaisa’s Chairman, Kwok Ying Shing, its CFO, Cheung Hung Kwong, have both resigned in December 2014 along three other board members leaving the company in total despair. Furthermore, following its recent HSBC default, two Kaisa partners in redevelopment projects have terminated cooperation with the company and now demand the immediate refund of US$193 million. Surprisingly, in the six months ending June 2014, the company was sitting on a US$ 1.5 billion in cash, which raises the possibility that Kaisa could be the Chinese version of Enron.
If indeed the company defaults on its bond six hours from now, international bondholders will have to report it in the Cayman Islands where almost all foreign Chinese bonds are registered through offshore companies. A move, which if taken, could spill over all other Chinese real estate bonds and make matters much worse for global economies. A second editorial would surely follow up at midnight, but meanwhile, hold your breath!
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