China bonds: Shenzhen auction inaction leaves defaulter strained

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To understand the meteoric rise of Chinese property prices, take a look at Shanghai. In 2000, the price of residential housing was just $455 per square metre. By 2020, the figure had jumped to $5,100. Shanghai and Shenzhen both ranked among the world’s five most expensive cities.

The surge propelled Shimao Group, active in both cities, into the top echelon of Chinese developers. Its default last year was a sign of how bad things were in the property sector. Its apparent failure to auction a key asset, disclosed on Wednesday, is a warning signal for the broader Chinese bond market.

Shimao was trying to sell a large, prestigious block of land in the southern industrial city of Shenzhen. According to the auction platform, no buyer was willing to pay $1.8bn for the project, even though that price was a fifth lower than the appraised value.

Investors remain wary of Chinese property. Yet that caution seems to have worn off in the bond markets. Chinese developers are raising money from welcoming offshore investors. Smaller businesses, including Seazen Holdings and Lvgem Group, sold more than $300mn worth of US dollar-denominated bonds to foreign investors in May. Local rivals plan to follow suit.

Shimao had been deemed a higher-quality proposition than some distressed developers. It owns some of the tallest skyscrapers and hotels in Shanghai and Hong Kong. Its troubles suggest the market for property has not bottomed out yet.

The deterioration in Shimao’s liquidity was first apparent in May last year when it asked for a one-year payment extension on an onshore bond worth just $65mn due that month. It owed almost $12bn to offshore creditors last year.

The stock market points to further deterioration in the Chinese real estate market. Zhuhai Wanda Commercial Management Group, the services unit of local property giant Dalian Wanda, is making a fourth attempt at a Hong Kong listing. Peer Sinic Holdings was delisted in April after being suspended for more than a year. Shimao along with many local peers remains suspended itself.

Shimao is considering using its Sheraton-branded hotel in Hong Kong as a supplemental credit enhancement for its broader debt restructuring plan. Dalian Wanda is reported to be considering offloading key assets including shopping malls.

Developers are running out of options to raise cash. Most dollar bonds below investment grade in Asia are issued by Chinese developers. That exposes the broader region’s bond market to the risk of sudden large swings with each new default.