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China´s real estate crisis worsens as a major Shanghai developer defaults

Another prominent Chinese developer has gone bankrupt, adding to the woes of the world’s second-largest economy’s real estate sector.

Another prominent Chinese developer has gone bankrupt, adding to the woes of the world’s second-largest economy’s real estate sector. According to a business filing with the Hong Kong stock market, Shanghai-based Shimao Group failed to pay the interest and principal on a $1 billion bond due Sunday. According to the offering contract, the bond had no grace period for the principal.

Shimao’s first delayed debt payments on a dollar bond come after the company has been dealing with rising financial difficulty for months. Since 2020, when Beijing began cracking down on excessive borrowing by developers to rein in their vast debt and restrict runaway home prices, China’s real estate market has been lurching from one crisis to the next. The troubles grew considerably last fall, when Evergrande, China’s second-largest property developer, began trying to acquire funds to repay lenders. With around $300 billion in liabilities, the troubled company is China’s most indebted property developer. Fitch Ratings designated it a defaulter in December.

Shimao Group has a considerable amount of debt expiring in 2022, according to Moody’s assessments earlier this year, including $1.7 billion in bonds owned by overseas investors, and 8.9 billion yuan ($1.4 billion) in bonds held by Chinese investors, and “sizable” offshore bank loans. Shimao, founded in 2001 by entrepreneur Hui Wing Mau, creates large-scale residential developments and hotels around the country. It owns Shanghai Shimao International Plaza, one of Shanghai’s largest skyscrapers in the city center.

Shanghai Shimao International Plaza
Shanghai Shimao International Plaza

In March, the business anticipated that its 2021 net profit would be down approximately 62 percent from the previous year, owing mostly to the “tough” climate facing the real estate sector. It then postponed the announcement of its 2021 findings, blaming the Shanghai lockdowns. “Due to major changes in the macro climate of the Chinese property market from the second half of 2021, as well as the impact of Covid-19,” Shimao stated in a filing on Sunday.

The business also said that it has been working with creditors to seek “amicable arrangements” over its inability to make principal payments on other offshore debt. If no deal is reached, creditors may force the corporation to expedite repayments. Since Evergrande’s bankruptcy, a number of high-profile developers in the nation, including Fantasia and Kaisa, have defaulted on their loans. Beijing’s zero-Covid policy and the faltering economy have worsened the industry’s troubles. To combat mounting Covid instances, China placed many of its largest cities, including Shanghai, under strict lockdown early this year, significantly hampering corporate operations. Sunac China, one of the country’s top developers, blamed the Covid outbreak last month for “seriously” harming its sales in March and April and increasing its cash crisis.

Simultaneously, the developer disclosed that it had defaulted on a dollar bond. According to a poll released on Friday by China Index Academy, a property research agency, prices for new homes in 100 cities fell more than 40% in the first half of this year compared to the same period last year. The authorities are attempting to stop the bleeding. They have increased their attempts to boost house sales by cutting mortgage rates and loosening home-buying restrictions. Some developers have come up with creative strategies to increase sales, such as accepting grain or garlic as a down payment or providing pigs as a buyer incentive.

Although there are indicators that sales decreased less significantly in June than in prior months, the road to the property sector’s recovery will likely be “very rocky,” according to Nomura analysts in a note released on Monday. Meanwhile, Evergrande is contemplating a massive debt restructuring plan led by the government. The developer intends to submit its recommendations before the end of this month.

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