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A Chinese real estate developer missed a key payment to foreign bond holders this week, heightening lingering fears of an upcoming crisis in China’s real estate sector.
The developer, Fantasia Holdings Group, a luxury property company founded by the niece of Zeng Qinghong, a former vice president, said Monday evening that it had failed to make the final payment of $ 206 million. The disclosure surprised investors already on the alert after two missed payments from China Evergrande Group, the world’s most indebted developer.
Nervous investors sold shares of other developers on Tuesday, causing some stocks to drop as much as 10%. Developer bond yields were trading at nearly a decade, meaning the cost of borrowing for businesses had skyrocketed.
In the disclosure made Monday night, Fantasia said its board “would assess the potential impact on the group’s financial and cash position under the circumstances.”
Fantasia, like Evergrande, is based in Shenzhen, southern China, but unlike its counterpart, Fantasia hasn’t had a hard time paying its bills so far. By failing to make its final payment on Monday, Fantasia caused a default. The company also failed this week to repay $ 108 million on a loan from Country Garden Services Holdings, another real estate company, according to a file released Monday.
Evergrande rocked global markets last month after failing to make a payment to foreign bondholders. Investors began to reconsider the long-held assumption that Evergrande was too big to fail and therefore could count on a government bailout. Now, many investors are wondering if other developers will face similar challenges.
Chinese developers are under pressure from regulators to pay off debts and tighten their belts after years of free borrowing from bondholders and banks.
Beijing is now trying to limit banks’ exposure to the real estate sector, leaving companies like Evergrande and Fantasia to struggle to find the liquidity they need to continue operations and pay overdue bills and obligations.
Evergrande alone has over $ 300 billion in debt. Other real estate giants, such as Vanke and Country Garden, are facing debts worth over $ 200 billion, although they are not under as much pressure as Evergrande.
Investors worry that financial problems will scare home buyers and make it more difficult for other developers to continue in business.
Chinese developers will need to make more than $ 28 billion in bond payments in US dollars in 2022, according to Fitch Ratings, another signal that the Chinese real estate market is facing headwinds even after the country’s remarkable rebound after the pandemic.
“The risk of a deeper slowdown in real estate activity cannot be ruled out,” wrote Tommy Wu, an economist at Oxford Economics, in a recent note to clients. “Especially at a time when China’s economic momentum is slowing after last year’s strong recovery.”
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