Fears of Lehman Brothers-like collapse in China as trust firm suspends payments

Posted on : 2023-08-16 17:03 KST Modified on : 2023-08-16 17:03 KST
Since real estate accounts for such a huge proportion of the Chinese economy, some experts warn that things could escalate into a systemwide crisis
A person walks by a Country Garden development site in Beijing, China, on Aug. 11. (Reuters/Yonhap)
A person walks by a Country Garden development site in Beijing, China, on Aug. 11. (Reuters/Yonhap)

Amid a spreading default crisis among Chinese real estate developers, even trusts investing in real estate have been unable to pay out on tens of billions of dollars in products.

The real estate crisis in China is now showing signs of spreading from real estate development businesses to real estate financing businesses.

According to reports Tuesday from news outlets including Hong Kong’s Ming Pao newspaper and China’s financial news provider CLS, Zhongrong International Trust Company recently deferred repayment on around 350 billion yuan in due products. The company is a real estate trust affiliated with Zhongzhi Enterprise Group, China’s largest private asset management group.

Real estate trust companies invest their clients’ funds in real estate and are obligated to pay back those investments with pledged interest payments once they come due.

The news came to light when three of the companies investing in Zhongrong International Trust announced to the Hong Kong stock market on Friday that they had not received their money back by the promised date. Collectively, the three companies invested around 90 million yuan.

As of late 2022, the total trust scale at Zhongrong International Trust was no less than 62.93 billion yuan. The company was highly active last year, investing in around 10 different real estate projects within China.

Anticipating a rebound in the real estate economy, it reportedly made large-scale investments last year in Country Garden, a real estate developer that has recently been facing a default crisis. Around 100,000 investors and corporations have entrusted over 3 million yuan to Zhongrong International Trust.

Analysts said the delay in Zhongrong International Trust’s repayments is a signal that the Chinese real estate crisis is now spreading from the real estate developments to the real estate financing sector.

The real estate crisis was touched off by the financial difficulties faced by Evergrande Group — one of China’s largest real estate developers — in late 2021, when the COVID-19 pandemic was raging. Since last month, it has been taking a more severe turn as one large-scale developer after another has been hit with a default crisis, including Wanda Group, Country Garden Holdings, and Sino-Ocean Group.

Country Garden in particular had been battling with Evergrande for first place in the Chinese real estate development industry. Its recent inability to pay interest on its bonds has come as a major shock to the market.

Among Chinese real estate companies, Country Garden had been seen as being in relatively favorable condition in cash-flow terms. Trading of 11 different Country Garden bonds was suspended on Monday, with a total value of 15.7 billion yuan.

Country Garden currently has around 3,000 different construction projects going on throughout China, or more than quadruple Evergrande’s roughly 700. But as of late 2022, Country Garden had around US$200 billion in liabilities, which was less than the US$333 billion that Evergrande was facing.

Some news outlets and critics have been sounding the alarm over the situation, which they likened to the Lehman Brothers collapse that developed into the global financial crisis of 2008. Since real estate accounts for such a huge proportion of the Chinese economy, they warn that things could escalate into a systemic crisis.

But while many were divided on the possibility of a Lehman Brothers-type situation erupting in China at the time of the Evergrande default crisis in 2021, that crisis did not end up translating into a crisis for the financial sector.

Chinese authorities have taken action in response. Bloomberg reported that the National Administration of Financial Regulation had held an emergency meeting Monday — ostensibly to discuss measures to address Zhongzhi-affiliated Zhongrong International Trust’s suspension of payments, among other issues.

China ended its pandemic-related blockade late last year, but the recovery of domestic demand has been sluggish.

The worsening real estate business conditions have been a big contributor to the stagnation of demand. Not only has the loss of jobs cut into income, but as housing prices have come down, assets have also declined — leaving people in even less of a position to open their wallets.

Meanwhile, volumes of unsold real estate have been skyrocketing. According to figures shared Tuesday by the National Bureau of Statistics of China, unsold commercial real estate stood at 645,640,000 square meters as of July. Up by 17.9% from the same period in 2022, the amount was equivalent in area to the city of Seoul.

By Choi Hyun-june, Beijing correspondent

Please direct questions or comments to [english@hani.co.kr]

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