About a year ago, Chinese billionaire Sun Hongbin was certain that his luxury real estate company Sunac China would never “bomb”.
Last week, his firm — China’s third-largest developer — defaulted, missing the deadline for coupon payments on a $US742 million ($1.1 billion) offshore bond.
Unlike Evergrande, which defaulted in December last year, Sunac appeared to be financially healthy and the boss, Mr Sun, had previously been diligent in repaying debts.
He even repaid some of the company’s debt out of his own pocket, Chinese media reported.
Betty Wang, senior China economist from ANZ Research, said Sunac’s default was “another blow to the fragile property sector”.
“The shock to the market confidence, especially in the private sector segment, was quite big,” she told the ABC.
“There are a lot of downside risks in the economy.”
A ‘white knight’ in trouble
While the Hong Kong-listed company has apologised for the default, it said it could miss more deadlines in the coming year.
The company also asked the creditors to give it some “time to overcome challenges” while it makes efforts towards “accelerating sales and payment collection, disposing of assets, seeking debt extension, and introducing strategic investors”.
Mr Sun is widely known as a “white knight” in the Chinese property market, who has been actively acquiring assets from his competitors in the past five years while the property market was cooling.
He made it to China’s 200-richest list when he was 40. In 2016, at the age of 53, his company became one of the top 10 developers in China through a rapid business expansion.
Now Sunac is one of the most indebted Chinese developers, with $US7.7 billion ($11 billion) in US dollar bonds.
After Beijing implemented the “three red lines” scheme — in order to reduce debt within the industry, curb runaway property prices and lift construction standards — a wave of defaults has hit the sector.
China’s biggest developer, Evergrande, is reeling under more than $400 billion in liabilities.
Other companies — such as Fantasia and Kaisa — have also defaulted after having struggled for access to finance or refinancing.
Since November last year, several policy adjustments at both state and local levels have been introduced in an attempt to salvage the collapsing property sector, while avoiding complete bailouts.
Last week, China’s central bank, the PBoC, announced that it would lower the mortgage rate for first home buyers for the first time in eight years, by 20 basis points.
However, Ms Wang said, Sunac’s default shows that the rescue policies have failed to prevent China’s real estate sector from declining further.
“Uncertainty surrounding lockdowns and their impact on the local economy have dampened the income outlook for households and constrained their purchasing power.”
On Friday, the PBoC cut the five-year loan prime rate (LPR), the benchmark for pricing most mortgages, from 4.60 per cent to 4.45 per cent to drive housing demand, while kept the one-year LPR unchanged, at 3.70 per cent.
Senior China economist Julian Evans-Pritchard from Capital Economics said the cut was the largest reduction on record, but the lack of any reduction to the one-year LPR suggested that the central bank was trying to keep easing targeted.
“We shouldn’t expect large-scale stimulus of the kind that we saw in 2020,” he said in a note.
More deadlines looming
However, the worst may be yet to come, as Chinese developers are facing another peak in offshore bond repayments in June and July.
ANZ Research estimates that $US14.3 billion ($20.3 billion) of offshore bond debt, or 25 per cent of this year’s annual amount, will be due in the next two months.
Sluggish home sales — which have been hit by strict COVID-19 lockdowns in parts of the country — have worsened the situation.
The top-30 listed developers in China reported an 11.1 per cent, year-on-year contraction in their collective cash position as at the end of 2021 and, since January, sales have dropped 32.2 per cent, year-on-year, according to ANZ Research.
Contractual home sales from China’s top-100 developers halved in April, meaning the estimated monthly operating income of $US5.7 billion ($8.1 billion) will not be enough to cover debt payments.
China’s property sector contributes more than 20 per cent of China’s economic output by some metrics, and Ms Wang said dampening across the whole sector would increase uncertainty for China’s growth outlook.
“A fiscal push and the infrastructure drive have picked up and may go some way to filling the gap if the property sector retreats, ” she said.
“We expect China’s potential growth to drop to the low end of the 4-5 per cent range in the next few years, much earlier than many others expect.”
NAB also has downgraded China’s GDP growth prospects, expecting China’s economy to grow by 4.2 per cent in 2022, down from 5 per cent forecast previously.
As Beijing has indicated that it would not bail out private developers, many firms are betting on a rebound in the sector sooner rather than later.
“The fall of another top developer is likely to accelerate the process of industry revaluation, putting the sector’s future at risk,” Ms Wang said.
“We remain cautious about the near-term outlook for private developers.”
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