Property Developer Meltdown in China

Red-hot risk now expanding to Western auditors, shadow banks, and Beijing itself

A man walks in front of unfinished residential buildings at the Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China, on Sept. 15, 2021. Carlos Garcia Rawlins/Reuters

News Analysis

China’s big property developers are increasingly weak, and through the pressure of local officials, unloading risk onto the country’s financial system and Beijing itself.

Business news about China’s property developers on March 29 demonstrates multiple new fissures and risks in China’s already lagging economy.

The Financial Times revealed that the West’s Big Four accounting firms are abandoning many of their long-prized Chinese property developer clients due to the latter’s failure to file audited annual financial results by the deadline. In March, the embattled property developer China Evergrande was one of the companies that announced it would miss its deadline in Hong Kong.

“International auditors are resigning from China’s heavily indebted property developers as a wave of delayed financial results has increased uncertainty over the full scale of the sector’s worst-ever crisis and raised the threat of hidden debts,” according to the article by Thomas Hale and Tabby Kinder.

“Auditors are at increasing risk of legal action in connection with the turmoil in the Chinese property sector.”

Bloomberg noted that Chinese “shadow banks” are buying controlling stakes in projects from the distressed developers, likely due to pressure from local officials. One trust executive explained that the deals are preempting restructuring plans, which will make payments and deal-making more difficult.

Another possibility is that the spectacle of an American firm, Oaktree Capital, acquiring a major Evergrande asset in Hong Kong, the 2.2 million-square-foot “Versailles mansion” residential development, by repossession in January, embarrassed the Beijing regime. It may have reacted by forcing creditors to swap debt for Evergrande equity.

In December, Evergrande defaulted and will soon restructure more debt than was ever previously restructured by a single firm in China. Evergrande bonds coming due in 2025 are now trading at just 13 cents on the dollar, according to Bloomberg.

Police officers stand guard outside the Evergrande International Center where protesters have gathered to seek payment from China Evergrande Group, in Guangzhou, Guangdong Province, China, on Jan. 4, 2022. David Kirton/Reuters

PwC, a Big Four accounting firm, is currently under investigation by Hong Kong authorities for its Evergrande audit. PwC and Deloitte, both headquartered in London, have resigned over the last three months as the auditors for, at minimum, five developers from China.

“International investors are moving closer to legal action against Evergrande, which has borrowed around $20bn on international bond markets, after the company said last week that a mystery lender had claimed $2bn of cash at its property services arm,” according to the Financial Times.

Bloomberg sources made clear that China’s shadow banks are not necessarily buying stakes in failing development projects on a voluntary basis. “Local governments are pushing creditors, including trusts, to help distressed developers like Evergrande offload stakes in projects and find strategic investors to raise cash.”

Officials are apparently doing this not for the economic efficiency of the projects, but for state-planning purposes. “The most pressing concern for authorities is to ensure housing construction, and many trusts are considering taking additional stakes in Evergrande projects,” according to Bloomberg sources.

The sales may save Evergrande and other distressed property developers in the short-term, but they will only provide them with enough liquidity to settle some of their $3.4 trillion in liabilities, while offloading risk to the financial institutions that purchase the projects.

These financial institutions have less experience as property developers, and are under pressure from the regime, at the local level, to maintain the flow of financing and building to retain construction jobs and the illusion of economic growth.

Ultimately, the shadow banks could fail as a result, which would require a bailout by the regime.

“China’s shadow banks are emerging as unlikely white knights for embattled property firms by becoming mini-developers themselves,” according to the Bloomberg authors. “Trust companies including MinMetals Trust Co. and Zhongrong Trust Co. have bought stakes in at least 10 real estate projects this year.”

The unfinished housing projects that they bought may or may not “yield cash to pay off some of the $280 billion in property-backed funds sold by trusts to investors,” according to Bloomberg.

The hardest-hit Chinese property developer by indebtedness is China Evergrande, which announced on March 29 that trading in its shares will remain suspended, according to Reuters.

The good news for Evergrande is that it recently sold a minimum of seven housing developments, recovering $300 million of its initial capital contribution and settling liabilities of approximately $1.1 billion. The bad news is that these sales were to its creditor institutions rather than to actual customers who would live in the homes.

AVIC Trust, a financial firm affiliated with China’s main aviation and defense manufacturer, was the second-largest lender among trusts to Evergrande as of mid-2020. Instead of receiving payments on the debt, the aerospace-defense linked financial company took control of two residential projects in March, including a 5,000-unit project in Guangzhou, and a project in Nanjing.

An unfinished residential building through a construction site gate at Evergrande Oasis, a housing complex developed by Evergrande Group in Luoyang city, China, on Sept. 16, 2021. Carlos Garcia Rawlins/Reuters

Evergrande sold Chongqing and Dongguan projects to China Everbright Trust, owned by China Everbright Group, which is itself owned by China’s ministry of finance and a state investment firm.

MinMetals Trust, which purchased a 100 percent stake in a Kunming city residential project from Evergrande, as well as Evergrande stakes in Foshan and Guangzhou projects, said that buying stakes in the projects is an “optimal option” to dissolve Evergrande debt risk, at the same time getting the projects going again, according to Bloomberg.

MinMetals Trust is part of China MinMetals, a state-owned enterprise involved in metals and minerals trading. The company has comparatively little experience in real estate development.

The problem is that Evergrande debt risk is not being dissolved, as claimed by MinMetals Trust. It has just moved to Evergrande creditors who are not as good at property development, or will be forced by the Chinese Communist Party (CCP) to send more good money after bad, infusing capital into the building of phantom cities with few residents.

These and other economic failures of state-planning of the economy have real effects. The family company of Hong Kong billionaire Joseph Lau lost approximately $1 billion on China Evergrande shares and bonds in 2021.

Perhaps as a result, he is selling art assets, including up to $19 million worth of imperial Chinese porcelain from the Ming and Qing dynasties, due for sale by Sotheby’s in Hong Kong on April 29.

While Lau loses his museum pieces, regular Chinese are losing much more: their retirement savings and the homes they purchased, but never had the privilege of living in.

These are the sorry effects of Beijing’s state-planning of the economy, which the CCP is doubling-down on through forcing the purchase of Evergrande’s failing development projects by managers even less capable of making them successful.

This is the economic system that the regime seeks to export to the rest of the world through its plans of global hegemony.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.