Zhejiang Xingrun Real Estate, a Chinese real estate developer based in Fenghua, a small town in Eastern China, is reported to be unable to repay some $400m in loans that it owes to more than 15 lenders, including China Construction Bank.
While the exact figure is difficult to pin down— the company is holding its cards close to its chest — commentators are jumping in to prophesy further defaults in the sector, linking widening spreads to the developer’s problems.
Evergrande Real Estate Group’s 8.75% 2018s are among the bonds used to back up this case. On Tuesday morning the bond stood at 93.75 to yield 10.49%. But this was actually higher than the previous day's 93.50, before the default started to be aired.
The same goes for Kaisa Group. Its 8.875% 2018s were at 96.25 to yield 10.04% on Tuesday morning, up from 96.00 on Monday.
Any recent falls in these two bonds probably have more to do with the fact that Joseph Lau, ex-chairman of Chinese Estates and a rumoured investor in Evergrande and Kaisa, was convicted in Macau last week for money laundering and bribing officials.
That Chinese property companies are finding it more difficult to access funding onshore is widely known, as the government attempts to keep property prices under control. The likes of Zhejiang Xingrun Real Estate will certainly be among the hardest hit.
As a result, huge numbers of Chinese property companies are seeking offshore funding and competition in the sector is incredibly high. Many are forced to offer considerable premiums if they want investors to sell similarly rated bonds that they already hold and then buy the new issues. The result is a widening of spreads.
Under pressure
Housing prices and sales are indeed falling across China, piling pressure on the sector. According to the National Bureau of Statistics, year-on-year growth of new home sales in floor space terms and value terms were -1.2% and -5.0% year to date, down from 7.2% and 13.1% in Q4 2013.
These factors are much more of a concern to bankers and developers than the default of a small privately owned company. The likes of Evergrande and Kaisa, who largely operate in tier one cities, are very different in terms of both scale of operation and access to funding.
The sector is also consolidating. Smaller cap companies like SPG Land, which was bought by Greenland Holding Group in May 2013, are being swallowed up by their larger peers as government funding restrictions make it harder for smaller companies to operate. Should this process continue — and it is expected that it will — smaller companies may be more likely to be absorbed than to default.
As default headlines ramp up, some selling (particularly from retail investors) is to be expected. But what is of much more concern are the market fundamentals — falling property sales, difficulty accessing onshore funding, and oversupply in the primary market. And that is before even starting to consider softening economic data from China and the depreciating renminbi.
Until this week, many had never even heard of Zhejiang Xingrun Real Estate. Now its particular problems are being touted as lighting the touchpaper for a calamity. But the truth is that the sector has been weak for a long time, and its problems go far beyond this default.