China’s fragile real estate bubble has started bursting already and it is all set to ruin the Chinese economy. China Evergrande Group, which is the second-largest real estate group in the Communist nation, is on the brink of defaulting on its debt obligations.
However, while the world looks at Evergrande Group’s downfall anxiously, a bigger debt crisis is evolving in China. In fact, another Chinese property developer has bitten the dust which exposes how China’s heavily indebted real estate sector is a ticking time bomb that can explode any time and lead to an unprecedented collapse in the Chinese economy.
Fantasia Holdings Group about to fall apart
Fantasia Holdings Group, a leading Chinese property developer, said on Monday that it had failed to repay $206 million in debts due on October 4. This is a new sign of tight liquidity and growing distress in the Chinese real estate sector.
The Fantasia Holdings Group had raised $500 million in the year 2016. The debt fell due in 2021, but the miserable position of the Chinese real estate market has crippled the property developer. In a statement to the Hong Kong stock exchange, the Fantasia Holdings Group said, “The company did not make the payment on that day.”
Meanwhile, Fitch Ratings has cut Fantasia’s credit grade by several notches to CCC, whereas S&P Global Ratings lowered too has downgraded Fantasia’s long-term ratings from B to CCC. Fitch Ratings said, “The downgrade reflects the default risk on Fantasia’s upcoming U.S.-dollar bond maturities, given its tight offshore liquidity position.”
How big is China’s real estate bubble?
The position of China’s real estate market is pretty bad. The Fantasia Group Holdings itself does not pose a major risk to the broader Chinese bond markets. The fact remains that it is much smaller in size when compared to the Evergrande Group.
As per data compiled by Bloomberg, Fantasia ranked 60th in terms of contracted sales in the first quarter of this year as against the 3rd rank for Evergrande Group. Fantasia’s total liabilities stood at $12.9 billion as of June 30, which dwarfs in comparison to Evergrande’s liabilities of $304.5 billion. Also, Fantasia’s offshore and local bonds amount to $4.7 billion as compared to Evergrande’s $27.6 billion.
However, Fantasia’s repayment default has corroborated concerns of a market contagion arising out of Evergrande’s imminent downfall. The fact remains that much of China’s real estate market growth is not based on useful activity. This is why the debt-driven real estate sector of China is suddenly staring into a deep crisis.
The Chinese government did try to cool the real estate bubble by curbing excess leverage and denying the liberty enjoyed by China’s real estate giants in the property sector to refinance debt.
However, this is exposing the issues of tight liquidity and cash crunch in the case of companies like Evergrande Group and Fantasia. The Chinese real estate giants are getting overstretched. Now, as companies fail to meet their debt obligations or at least stand at the risk of failing to meet them, the Chinese real estate sector is facing a contagion effect.
China’s hidden debt troubles
China’s real estate bubble and debt crisis are bigger than you can imagine. Fitch Ratings said, “The existence of undisclosed liabilities could significantly affect our leverage, coverage and liquidity calculations and forecasts.”
As per Bloomberg, Fantasia’s nonpayment underscores the struggle of investors to identify opaque debt obligations in the Chinese real estate sector. Only last week, Fantasia had refuted a report that money for a privately placed bond had not been transferred.
China’s hidden debt is in any case a huge problem. There is a culture of undertaking opaque debt obligations in China and even the local Chinese governments have formed local government financing vehicles, or LGFVs.
These LGFVs undertake most of the debt obligations for Belt and Road Initiative (BRI) projects and other government expenditures. This debt should technically amount to local government debt, but local governments in the Communist nation seem to bypass debt obligations and keep their balance sheets clean by relying on LGFVs.
Ultimately, the debt crisis in China’s real estate bubble is going to spill over to other sectors of the Chinese economy. With more debt defaults, Chinese and overseas investors are bound to feel the pain of a bursting Chinese real estate bubble.
