Countdown to Chinese Real Estate Collapse

eTradingPicks

Junior member
15 1
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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Jack o'Clubs

Experienced member
1,554 342
Complete nonsense. One subscale low quality real estate developer in China going bust has no systemic impact whatsoever. To call this the Chinese version of Enron is an absolute joke.
 

eTradingPicks

Junior member
15 1
Complete nonsense. One subscale low quality real estate developer in China going bust has no systemic impact whatsoever. To call this the Chinese version of Enron is an absolute joke.
Jack.. good point! Maybe one Chinese "low quality" real estate developer is not to be compared to Enron's $63.4 billion in assets, which made it the second largest corporate bankruptcy in U.S. history.. but the domino effect this could have on other Chinese real estate developers was the base of this comparison.. we're talking here about a $55 billion debt.. but anyways.. only time will tell.. so let's wait and see.. oh.. and thanks for caring to share your thoughts :)
 

Jack o'Clubs

Experienced member
1,554 342
There will be no domino effect. Chinese property bond spreads widened a bit today, and the assumption already is that Kaisa will go under. There will be no contagion. Sorry, but your post is sensationalist and just wrong.
 

Jack o'Clubs

Experienced member
1,554 342
To be a bit less grumpy and a bit more constructive.... There's obviously something very political going on here as the Shenzhen local government blocked Kaisa developments it had already approved. Who knows who Kaisa management had upset or failed to sufficiently bribe. Anyway, Kaisa's assets will be mopped up by a state-owned ' rescuer' who will also take care of any collateral damage, end of story.
 

eTradingPicks

Junior member
15 1
There will be no domino effect. Chinese property bond spreads widened a bit today, and the assumption already is that Kaisa will go under. There will be no contagion. Sorry, but your post is sensationalist and just wrong.
Jack.. no worries :) I'm used to accept different points of view no matter how different they are than mine.. so once again, thanks for sharing yours :)
 

eTradingPicks

Junior member
15 1
To be a bit less grumpy and a bit more constructive.... There's obviously something very political going on here as the Shenzhen local government blocked Kaisa developments it had already approved. Who knows who Kaisa management had upset or failed to sufficiently bribe. Anyway, Kaisa's assets will be mopped up by a state-owned ' rescuer' who will also take care of any collateral damage, end of story.
Maybe this would be the short-term remedy.. but I will tell you one thing, which is particular to the Chinese real estate market.. large Chinese real estate developers have a higher asset liability ratio, which highly exposes them to default risk.. so bearing this in mind, when I see a small developer defaulting I can't help but imagine what would be the case for larger companies.. helping a small firm is never a problem, it's when the big ones start shaking that the bubble usually bursts.. maybe I'm wrong.. maybe it's exaggerated like you said.. time will surely tell..
 

eTradingPicks

Junior member
15 1
And this is a follow up to the original article posted earlier today:

Kaisa Defaults as Bondholders Await a Miracle

As anticipated, Chinese real estate developer, Kaisa Group Holdings Ltd defaulted on its 2020 debentures interest payment, which was due yesterday no late than midnight Hong Kong time. Now international bondholders are waiting for a miracle to secure their capital. The company refused to comment on the unfolding story and settled for a “Clarification Announcement” a day earlier where it insisted that it’s not winding up or restructuring the group, but is rather assessing the overall impact of recent developments on its financial position. Kaisa finally promised an update “as soon as possible”.

The Chinese developer now has another 30-day deadline where it is allowed to resolve the issue before the matter gets worse. It is also worth noting that if the company doesn’t act quickly during this one-month grace period, creditors could force it to file for bankruptcy; a move, which if taken would make Kaisa the first real estate developer to default on a US Dollar dominated bond.

An alternative solution would be if Kaisa sells all or part of its assets, which are mainly concentrated in the city of Shenzhen. However, for the time being, a court in Shenzhen has barred the company from selling any of its assets until further notice following its default on an HSBC loan on December 31st, 2014. The court decision was in response to several creditors’ requests to have Kaisa’s assets frozen to protect their capital.

Finally, a restructuring process is surely in the cards, however, such a path would put international bondholders last in line. As per Chinese regulations, the company’s employees, its local bank creditors and its Chinese bondholders would have to be paid first. The Chinese government could definitely consider a bailout package for Kaisa, but the fear of a backfire where larger developers would opt for the same, would definitely force it to think twice before rescuing the company.
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Atilla

Legendary member
19,033 2,677
And I had posted this back in January :)
@Atilla, thanks for sharing this.. very informative I should say..

Certainly one to follow closely. Many building companies have dollar debt too. Don't see this ending well.

i do support the anti corruption drive and believe best to take a snakes head off first.

Rock on the Chinese:clap::clap:
 

eTradingPicks

Junior member
15 1
Certainly one to follow closely. Many building companies have dollar debt too. Don't see this ending well.

i do support the anti corruption drive and believe best to take a snakes head off first.

Rock on the Chinese:clap::clap:
LOL.. couldn't agree more!
 

TechQuant

Well-known member
264 52
There is a property slump and 15Q1 GDP grew at a sluggish 7% YoY. But the country is moving away from investment and into consumption which will help dampen this and any similar sensational 'scares' that the media depend upon. More importantly is that China is at long last handling reform and in a big way. Capital controls are being loosened, interest rates beginning to be allowed to float above their artificial lows. The balance between local and central government spending and tax revenue raising is being addressed. The former labyrinth restrictions and bureaucracy involved in starting private companies is being eased, albeit slowly.

Real estate is finding it's true level, but this is by no means a bust.
 

eTradingPicks

Junior member
15 1
There is a property slump and 15Q1 GDP grew at a sluggish 7% YoY. But the country is moving away from investment and into consumption which will help dampen this and any similar sensational 'scares' that the media depend upon. More importantly is that China is at long last handling reform and in a big way. Capital controls are being loosened, interest rates beginning to be allowed to float above their artificial lows. The balance between local and central government spending and tax revenue raising is being addressed. The former labyrinth restrictions and bureaucracy involved in starting private companies is being eased, albeit slowly.

Real estate is finding it's true level, but this is by no means a bust.

@TechQuant.. if the Chinese government delivers on those promises, the world will be a much happier place :) commodities price deflation will reverse course, precious metals would rebound, and many dependent economies will finally experience some real growth.. so I surely hope they do, especially in the "moving away from investment and into consumption" part..

Thanks for sharing your insights..
 

TechQuant

Well-known member
264 52
That's possibly a non sequitur using standard economic models, but macro goes its own way these days so who knows.
 

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