Shimao defaults as concerns over China's property crisis grow, Mixed reactions to Abe assassination & Xi's epic "zero-Covid-closed-loop" fail in Hong Kong -- China Boss News 7.11.22
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Shimao defaults as concerns over China's property crisis grow
“Another major Chinese developer has defaulted on its debt, dealing a new blow to the ailing real estate sector in the world's second largest economy,” CNN’s Laura He reported.
He, CNN Business:
Shanghai-based Shimao Group failed to pay the interest and principal on a $1 billion bond due Sunday, according to a company filing to the Hong Kong stock exchange. The bond had no grace period for the principal, according to its offering document.
It is the first missed debt repayment on a dollar bond by Shimao, which had been grappling with mounting financial stress for months.
Shimao is China's 13th largest developer, significantly smaller than the country's no. 2 Evergrande which dominated headlines in 2021 when it defaulted on $1.2 billion in foreign bonds. (I wrote about that and China's massive debt crisis on Harris Bricken's China Law Blog, here. )
But analysts are watching the group closely as a possible bellwether for the pervasiveness of hidden debt in China’s property sector - a $52 trillion industry which makes up nearly a third of the national economy. Here’s how I described Shimao’s troubles earlier this year:
Brandao, China Law Blog:
Recent news that China’s 13th largest developer, Shimao Group, is also struggling sent shockwaves across the property industry. Shimao had not been designated by the PBOC or the Ministry of Housing and Urban-Rural Development – the two supervisors responsible for curbing over-leveraging in China’s real estate market – among firms in danger of crossing any of Beijing’s “three red lines” – rules that restrict new borrowings of heavily indebted developers annually. The sudden default of Shimao’s Shanghai unit on a US$101m project in early January alerted analysts to serious problems with transparency and oversight, leading some to “fear Shimao’s difficulties could be more destabilizing for the Chinese property market than the Evergrande and Kaisa crisis,” according to Aljazeera.
Aljazeera’s reporters also described “a general sense of unease over the company’s lack of visibility” that had emerged after investors learned “that homebuyers who recently purchased 96 Shimao properties in Shanghai were not able to register for the transfer of ownership titles, as the properties had already been pledged to one of Shimao’s lenders,” and that “[f]or many months, Shimao’s onshore bonds were also traded at more heavily discounted prices than their offshore bonds.” The speed of credit down ratings and a sharp plunge of “more than 50 percent” in Shimao’s share prices since November had also “caught investors off-guard.”
“[P]roblems” in China’s property market “escalated significantly last fall when Evergrande — the second largest property developer in China — began scrambling to raise cash to repay lenders, ” He said. “The embattled firm is China's most indebted property developer with some $300 billion in liabilities,” and “was labeled a defaulter by Fitch Ratings in December.”
Charlene Chu, an expert “famed among China watchers for warning about a debt bubble when at Fitch Ratings,” says she thinks the “pain is only just beginning for credit extended to Chinese property,” acccording to Bloomberg. “A bigger risk looms if Chinese individuals start defaulting on property loans -- a prospect made more likely by the increase in Chinese unemployment,” Chu warns.
Bloomberg:
While banks have the safeguard of collateral for their loans to developers, “where things could start to get a lot more ugly” is if lenders start revaluing that collateral lower, Chu said in a June 15 interview with the One Decision podcast.
“We’re just so early in this process of these defaults happening, and restructurings usually take quite a long time,” said Chu, who was known at Fitch for warning in the early 2010s over debt risks in the shadow banking sector. “We haven’t really gotten to the point of saying, ‘OK, well, what really is going to happen with that building?’”
For the rest of Laura He’s report in CNN, China's real estate crisis deepens as big Shanghai developer defaults, click here. For my two-part piece posted earlier this year in China Law Blog, Is China too big to fail? Evaluating financial contagion and systemic risk in China’s current debt crisis (part 1), click here; for part 2 discussing Shimao Group, click here. For Bloomberg’s report on Chu’s predictions for the property sector, China Property Slide ‘Early’ in Game After $1 Trillion Defaults, click here.
*For more news on the latest developments in China’s real estate crisis, see China’s Property Slump Is a Bigger Threat Than Its Lockdowns (Bloomberg), here, and China developers face $13bn wall of dollar bond payments in second half (Financial Times), here.
Law and International Xi
Mixed reactions to Abe assassination in China
While “[t]he assassination of former Prime Minister Abe Shinzo, Japan’s longest-serving leader, during a campaign event in Nara, Japan, has shocked the world,” news of Abe’s death has “sparked mixed reactions,” in China, The Diplomat’s China editor Shannon Tiezzi said.
Tiezzi, The Diplomat:
As Manya Koetse reported for What’s on Weibo, anti-Japanese sentiments were rife on Weibo after the assassination, with many expressing glee that Abe was dead. Many comments called the attacker a “hero” and suggested China should remember the assassination date as a “historic day.” A Chinese reporter who became emotional when giving an interview about the attack was roundly denounced by social media users, with many accusing her of not being Chinese.
Politico’s Nicolle Liu and Phelim Kine provided additional examples of some of the nastier comments written by Chinese nationalists that were trending online:
Liu and Kine, Politico:
Multiple commentators on Weibo, a Chinese social media platform, greeted news of Abe’s shooting — allegedly by a 41-year old Japanese man whose motives remain unclear — at a campaign event Friday by calling for “wine and dine” to toast his death. Some said his killer is a “hero,” as Abe pioneered a foreign policy geared to countering the expansion of China’s growing economic, diplomatic and military footprint in the Indo-Pacific that infuriated Beijing.
… Below a CCTV news post reporting Abe’s death that received 2.55 million likes, some commentators celebrated the incident.
“This person [Abe’s assassin] will be written in Japanese history,” a top comment said as “Shinzo Abe’s death” became one of the top trending items Friday on Weibo. “Good and evil will always be rewarded,” said another. Users also pointed to Thursday’s anniversary of the Marco Polo Bridge Incident, which marked the start of Japan’s full-scale invasion of China in 1937.
For the rest of Shannon Tiezzi’s report, China Reacts to Abe Shinzo Assassination, click here. For Liu and Kine’s update in Politico, China’s internet expresses glee at Abe’s assassination, click here.
US Ambassador calls on Beijing to “stop spreading Russia’s lies” in Chinese govt-sponsored public debate
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