China’s property crisis is going to get much worse before it gets better. A 🧵.
The debt crunch at ‘better’ firms like Shimao is key signal of what’s to come, even now that massive uncertainties like Evergrande and Kaisa defaults are out of the way. 1/8
TLDR on China's property crisis: 2022 is not just going to be about how much property firms owe in debt – but who OWNS that debt. 2/8
As the economy slows, the property crackdown rolls on and the network of real estate trusts, weaker banks/FIs, suppliers, contractors, workers etc all suffer – there’s going to be a lot less willingness to grant property firms a break when they get behind on payments. 3/8
Look at Shimao: its unit declared in default by China Credit Trust. No regulator intervention. No negotiations over an extension. Just a notice.
That’s v different from a month ago when regulators were arranging extension talks between Shimao and trusts like Minsheng. 4/8
While stronger trust firms (or ANY stronger creditors) may be able to weather a missed payment or two, other weaker companies will have increasingly little tolerance or capacity for this. 6/8
If you’re a smaller trust firm or supplier etc with weaker finances, offering payment extensions to property borrowers that might suffer a full on credit crisis down the line probably isn’t particularly appealing. And doing that hasn't necessarily worked out so far. 7/8
In 2022, we’re going to see creditors increasingly anxious to get back what they’re owed -- because their own tight finances mean they can’t afford to wait for repayments or to avoid the risk of becoming embroiled in a broader debt crisis at a borrower or both. 8/8
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For debt nerds some thoughts on Evergrande's restructure:
PBOC Yi Gang’s remarks that this will be a market-oriented, creditors will be treated according to seniority isn’t new to investors. China’s been pushing for this since at least 2017 when it began allowing record defaults
The issue for Evergrande’s global bondholders won’t be about seniority -- nearly all the offshore bonds hold the same status. Instead, all eyes are on whether notes issued by different units of Evergrande will be considered pari passu when it comes to any potential haircuts
It’s not clear whether bonds issued by Evergrande’s Hong Kong-listed unit (EVERRE) or those sold by a Scenery Journey (TIANHL) that have keepwells from its main onshore property business, Hengda Real Estate, will be considered on an equal footing in a restructuring scenario
2/ China’s efforts to prevent a developer debt crisis from sparking financial contagion helped stemmed the biggest selloff in a decade.
But Xi Jinping’s government still faces a long list of challenges as it tries to maintain calm in its $13 trillion credit market in 2022.
3/ There've been seismic changes in China's credit markets this year. In 2022 watch out for:
* Surprise defaults
* Home sales
* Policy easing
* Pickier investors
Tentative signs that Chinese authorities may be relaxing some property policies policies has stemmed panic-selling in credit markets. That won’t offer much relief for many developers.
This is why 👇 THREAD 1/
2/ It looks like Beijing will use state firms to ease a historic liquidity crisis: government-linked firms may be used to acquire distressed developers triggered the first real gains for property notes since Evergrande ran into trouble. shorturl.at/tzTZ2
3/ State developers are already selling sizable bond deals in a revival of the interbank bond market. Cash could be used to buy up private developers’ assets as they try to raise cash.