The Credit Collapse in China

As the country’s real estate companies stumble, weak disclosure standards and contradictory communications are angering global bondholders and discouraging long-term investment in China.

Dalian Wanda Group had initially assured bondholders that everything was fine and there would be no problem repaying $400 million in bonds. Some creditors were informed that the company was short of $200 million a few days later, triggering a frantic debt sell-off. Then, just as quickly, lenders were told there was enough liquidity, causing bond prices to rise again. The group did eventually pay off its debt in July. Still, the impact on investor confidence was shaken.

And this is just the latest episode in a series of mishaps that have eroded trust and sent the yuan into hell this summer. Country Garden, after missing the initial deadline to pay interest on bonds last month, then left investors in the dark for weeks about whether it intended to pay the bonds before their grace periods expired. The group finally paid the interest this week, further infuriating international investors.

Last year, state-backed real estate firm

shocked the market by unexpectedly requesting a one-year delay in repaying one of its dollar-denominated bonds, only to repay separate bonds a few months later. In 2021, Fantasia Holdings Group shocked investors by defaulting on a dollar bond just weeks after assuring creditors that it had no liquidity problems and days after repaying a private note.

Of course, China was not exactly a shining example of corporate governance. Several companies have been grappling with hidden debts and accounting errors for years. But with offshore Chinese bonds averaging over 9% returns between 2012 and 2020 (compared to less than 7% for U.S. debt), fund managers were not too discerning. Unfortunately, those gains are now a distant memory. Offshore Chinese bonds, issued mainly by property developers, have lost over $127 billion in value since their peak just two and a half years ago.

The government’s implementation of regulations limiting real estate speculation has killed the golden goose. These policies were intended to help curb years of excessive expansion driven by developer debt and real estate speculation by homebuyers. However, they ended up pushing a record number of companies into default as refinancing costs increased, leading to a series of restructurings.

The world’s second-largest economy hardly needs additional challenges. A private survey of China’s services sector showed its slowest growth of the year in August, as prospects dimmed and the property crisis prevented people from spending. Beijing is attempting to boost confidence after the latest data showed home sales dropped for the third consecutive month, adding to deflationary pressure. Last week, China allowed its biggest cities to reduce homebuyer payments and encouraged lenders to lower rates on existing mortgages.
This would deal another blow to an economy already struggling to attract foreign investors. Last week, U.S. Commerce Secretary Gina Raimondo said that U.S. companies are increasingly viewing China as “not investable,” even though Beijing has promised in recent months to treat international investors better. But, it is probably too late.

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