The latest Chinese real-estate company to run into serious trouble is a lesson in the risks attached to Chinese property: They are neither predictable, nor limited to the sector alone.
This week, China Fortune Land Development said it had overdue debt repayments worth 5.26 billion yuan, equivalent to $814 million. It blamed the macroeconomic and credit environment.
The company specializes in developing industrial parks and entire new districts. As recently as 2018, its flagship development Gu’an New Industry City, south of Beijing, was heralded as “a model for the kinds of ‘new type’ urbanization that the Chinese government hopes to see develop across the country,” according to a report from the University of Pennsylvania’s Wharton School and E-House China, a property data and information services website.
Analysts tend to present every troubled real-estate company in China as an idiosyncratic case, but a rapid slide in China Fortune Land’s credit ratings naturally raises questions about which other property developers are currently enjoying an unrealistically low cost of capital. Since January,
Moody’s Investors Service
and Fitch Ratings have downgraded the company four and seven notches, respectively, putting it deep into junk territory. That’s a demonstration of just how quickly things can change.
The pricing of the company’s bonds suggests the same. Dollar debt maturing in late February 2021 yielded below 5{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} as recently as September.
And things are unlikely to get easier soon. It appears that China’s credit cycle has topped out already, and real-estate developers will be particularly pinched due to Beijing’s “three red lines” policy on debt metrics that will constrain their borrowing.
The incident is also a reminder that nothing goes completely untouched by real estate in China. Ping An, widely considered to be one of China’s most prominent large, innovative private companies, holds around a quarter of the company’s shares and has a total exposure of about $8 billion to the company.
Having prominent creditors is good news for real-estate companies that get into trouble, but less good news for the larger, solvent companies that are often pressed by the local or central government to come to their rescue. That relationship feeds into the biggest problem with Chinese property: It inhales capital from across the financial system, making financing for other companies more expensive and dragging down the country’s productivity.
The fast descent of China Fortune Land should make investors in the dollar debt of Chinese property developers wary. But more than that, the whole tale illustrates that even in the more attractive investment opportunities in China, there is no way to escape the fragility of the country’s real estate.
Write to Mike Bird at [email protected]
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