Investors brace for $130B loss as China’s housing market falters

“Crisis of confidence” provoked a dip in much-needed sales

Suburban neighborhood with Chinese flag
(Illustration by The Real Deal with Getty)

Investors in Chinese developers are pricing in $130 billion of losses as they anticipate a grim future for the nation’s faltering housing market.

Two-thirds of their dollar bonds are trading below 70 cents on the dollar, a signal of distressed debt, the Financial Times reported, citing Bloomberg data. Beijing needs to start a full-scale bailout instead of the narrow steps it’s taken so far after home sales dropped by 30 percent in the first half of the year, analysts told the publication

“It’s very clear many more developers’ offshore [dollar] bond prices have fallen sharply since last year,” Cedric Lai, an analyst at Moody’s, told the publication. “We still believe defaults will continue through the rest of 2022, particularly for developers with large offshore debt maturities and weak sales.”

The numbers are stark: $300 million of dollar bonds sold by Kaisa Group, which mature on Sept. 7, are trading at 9 cents on the dollar, implying a $272 million loss. Shimao’s $300 million of bonds fetch just 10 cents, suggesting a loss of $268 million. Traders are marking down the debt after Chinese developers missed payments on $31 billion of bonds this year, a record.

“There’s a good reason these bonds are trading at distressed levels,” said a Hong Kong banker who has the Asian debt syndicate for a European lender. “The odds of a lot of these guys ever repaying is anyone’s guess.”

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While investors initially anticipated that only the most debt-burden firms, such as Evergrande, would take a hit, stalled projects throughout the industry has prompted concern among buyers that the companies won’t deliver homes that have already been sold. The resulting drop in consumer confidence has brought protracted revenue shortfalls.

Beijing last month shelled out $44 billion to finish incomplete developments, a move that came after home buyers threatened to hold off on paying mortgages for incomplete homes. The government stepped in to censor protests by the homebuyers on social media.

The Chinese government’s crackdown on excessive borrowing, meantime, has sent developers scrambling for funds, with less money to invest in U.S. markets.

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– Kate Hinsche