Share on facebook
Share on twitter
Share on telegram
Share on whatsapp
Share on linkedin
Share on print
Share on email

Risk Watch: Crashing China Property Stocks in Hong Kong Forebode Bubble Crisis

◎ Mainland property developers will likely face severe financing problems in 2019.


In the afternoon of Jan. 17, three Hong Kong-listed stocks suddenly plummeted by over 60 percent. Two of the three shares were those of Jiayuan International (down 80.62 percent) and Sunshine 100 China Holdings (down 64.59 percent). Other Chinese property developers like Evergrande (3 percent), Country Garden (3.5 percent), R&F Properties (3.5 percent), Vanke (3.7 percent), Longfor Properties (9 percent), and Glory Land (21 percent) all saw their listed shares in Hong Kong collapse.

The crashing mainland property developer shares also affected the shares of Hong Kong property developers and saw the market evaporate HK$120 billion ($15.38 billion) at the close. The loses by Chinese property developers accounted for HK$117.4 (about 101.3 billion yuan) of the HK$120 billion.

On Jan. 18, Jiayuan’s shares surged 74.6 percent and the mainland property index rose by more than 1 percent. The closing price of Jiayuan’s shares was HK$4.40, down 70 percent from the previous day (HK$13.26).

The backdrop:
Jan. 1: Chinese financial website Leju Caijing releases its 2018 China property sales growth ranking. Per Leju’s ranking, Jiayuan Group’s total sales in 2017 was 7.92 billion yuan (about $1.17 billion) and 87.55 billion yuan in 2018. The tenfold increase in Jiayuan Group’s sales figure caused skepticism in the real estate industry.

Jan. 14: In a statement, Jiayuan Group said that Leju Caijing had mixed up the sales figures of Jiayuan Group and Jiayuan International. Jiayuan Group noted that its total sales in 2017 was 50.825 billion yuan while sales in 2018 was 87.55 billion yuan, or an actual increase of 72.2 percent.

Jiayuan International’s share price fell 6.23 percent on Jan. 14; 0.42 percent on Jan. 15; 8.58 percent on Jan. 16, and then 80.62 percent on Jan. 17.

Jan. 17: Jiayuan International confirmed in an announcement that Jiayuan Group had paid off senior debt issued on Jan. 19, 2018 and April 26, 2018 worth $350 million (interest rate of 8.125 percent).

Jan. 18: According to a report on China.org.cn’s property website, Jiayuan Group’s actual controller (also the actual controller of Jiayuan International) was scrapping plans to issue a short-term financing bond (250 million yuan basic issuance amount capped at 500 million yuan) in Q1 2019.

Our take:
1. Jiayuan International is considered a “dark horse” among the Hong Kong-listed mainland property developers. The company was listed in Hong Kong in March 2016, and its share price rose 500 percent in two years.

We believe that the sudden collapse of Jiayuan shares is a sign that the mainland property bubble is in danger of bursting and the market is very concerned about the debt risk of Chinese property developers.

2. The People’s Bank of China’s relaxation of financing restrictions last year saw mainland property developers initiate new waves of intense fundraising in November 2018. Since the start of 2019, developers have been announcing new financing plans virtually every day; to date, there are over 30 financing plans with a total scale of more than 80 billion yuan. Many of the property companies are seeking financing to repay soon-to-expire debts, whose annual interest rates are steadily increasing.

For example, Chinese property developer Modern Land issued a $150 million senior note (interest rate of 15.5 percent) on Dec. 20, 2018. Of the $150 million, $147 million is meant for debt refinancing.

On Jan. 4, R&F Properties announced that it plans to issue 9 billion yuan worth of bonds to repay some of the bonds that will be sold back in 2019. To date, R&F has issued 7.02 billion yuan of bonds at a 7 percent interest rate. According to incomplete data from mainland media, R&F issued at least 26 bonds in 2018 with a total financing amount of over 50 billion yuan.

3. The Sino-U.S. trade war has worsened China’s economic downturn and caused the country’s consumption to shrink greatly. The deteriorating economic conditions have also led to growing business failure and rising unemployment.

Likewise, China’s property sector took a hit in 2018 with slower sales during China’s Golden Week despite steep discounts for housing. With residential leverage ratios hitting a peak, China’s property markets look bleak. Housing sales in 2019 could prove to be very pessimistic.

4. Mainland property developers like Jiayuan Group will likely face severe financing problems in 2019 owing to their reliance on foreign funding in recent years.

Developers turned to overseas financing because domestic policy at the time was restricting the flow of funding to the property sector. Concurrently there were ample funds from abroad due to U.S. quantitative easing policies and very low Federal Reserve interest rates.

Many developers issued five-year bonds in 2013 and 2014. That means that 2018 and 2019 are the peak period for repayments. With the renminbi depreciating by nearly 10 percent in 2018, however, mainland property developers suddenly find themselves having to pay more to finance their overseas debt.

5. We believe that China’s property bubble is at risk of bursting in 2019 if the Sino-U.S. trade war intensifies.

In our China 2019 outlook, we predicted that “a few major property companies could file for bankruptcy” this year.

Search past entries by date
“The breadth of SinoInsider’s insights—from economics through the military to governance, all underpinned by unparalleled reporting on the people in charge—is stunning. In my over fifty years of in-depth reading on the PRC, unclassified and classified, SinoInsider is in a class all by itself.”
James Newman, Former U.S. Navy cryptologist
“Unique insights are available frequently from the reports of Sinoinsider.”
Michael Pillsbury, Senior Fellow for China Strategy, The Heritage Foundation
“Thank you for your information and analysis. Very useful.”
Prof. Ravni Thakur, University of Delhi, India
“SinoInsider’s research has helped me with investing in or getting out of Chinese companies.”
Charles Nelson, Managing Director, Murdock Capital Partners
“I value SinoInsider because of its always brilliant articles touching on, to name just a few, CCP history, current trends, and factional politics. Its concise and incisive analysis — absent the cliches that dominate China policy discussions in DC and U.S. corporate boardrooms — also represents a major contribution to the history of our era by clearly defining the threat the CCP poses to American peace and prosperity and global stability. I am grateful to SinoInsider — long may it thrive!”
Lee Smith, Author and journalist
“Your publication insights tremendously help us complete our regular analysis on in-depth issues of major importance. ”
Ms. Nicoleta Buracinschi, Embassy of Romania to the People’s Republic of China
"I’m a very happy, satisfied subscriber to your service and all the deep information it provides to increase our understanding. SinoInsider is profoundly helping to alter the public landscape when it comes to the PRC."
James Newman, Former U.S. Navy cryptologist
“Prof. Ming’s information about the Sino-U.S. trade war is invaluable for us in Taiwan’s technology industry. Our company basically acted on Prof. Ming’s predictions and enlarged our scale and enriched our product lines. That allowed us to deal capably with larger orders from China in 2019. ”
Mr. Chiu, Realtek R&D Center
“I am following China’s growing involvement in the Middle East, seeking to gain a better understanding of China itself and the impact of domestic constraints on its foreign policy. I have found SinoInsider quite helpful in expanding my knowledge and enriching my understanding of the issues at stake.”
Ehud Yaari, Lafer International Fellow, The Washington Institute
“SinoInsider’s research on the CCP examines every detail in great depth and is a very valuable reference. Foreign researchers will find SinoInsider’s research helpful in understanding what is really going on with the CCP and China. ”
Baterdene, Researcher, The National Institute for Security Studies (Mongolian)
“The forecasts of Prof. Chu-cheng Ming and the SinoInsider team are an invaluable resource in guiding our news reporting direction and anticipating the next moves of the Chinese and Hong Kong governments.”
Chan Miu-ling, Radio Television Hong Kong China Team Deputy Leader
“SinoInsider always publishes interesting and provocative work on Chinese elite politics. It is very worthwhile to follow the work of SinoInsider to get their take on factional struggles in particular.”
Lee Jones, Reader in International Politics, Queen Mary University of London
“[SinoInsider has] been very useful in my class on American foreign policy because it contradicts the widely accepted argument that the U.S. should work cooperatively with China. And the whole point of the course is to expose students to conflicting approaches to contemporary major problems.”
Roy Licklider, Adjunct Professor of Political Science, Columbia University
“As a China-based journalist, SinoInsider is to me a very reliable source of information to understand deeply how the CCP works and learn more about the factional struggle and challenges that Xi Jinping may face. ”
Sebastien Ricci, AFP correspondent for China & Mongolia
“SinoInsider offers an interesting perspective on the Sino-U.S. trade war and North Korea. Their predictions are often accurate, which is definitely very helpful.”
Sebastien Ricci, AFP correspondent for China & Mongolia
“I have found SinoInsider to provide much greater depth and breadth of coverage with regard to developments in China. The subtlety of the descriptions of China's policy/political processes is absent from traditional media channels.”
John Lipsky, Peter G. Peterson Distinguished Scholar, Kissinger Center for Global Affairs
“My teaching at Cambridge and policy analysis for the UK audience have been informed by insights from your analyzes. ”
Dr Kun-Chin Lin, University Lecturer in Politics,
Deputy Director of the Centre for Geopolitics, Cambridge University
" SinoInsider's in-depth and nuanced analysis of Party dynamics is an excellent template to train future Sinologists with a clear understanding that what happens in the Party matters."
Stephen Nagy, Senior Associate Professor, International Christian University
“ I find Sinoinsider particularly helpful in instructing students about the complexities of Chinese politics and what elite competition means for the future of the US-China relationship.”
Howard Sanborn, Professor, Virginia Military Institute
“SinoInsider has been one of my most useful (and enjoyable) resources”
James Newman, Former U.S. Navy cryptologist
“Professor Ming and his team’s analyses of current affairs are very far-sighted and directionally accurate. In the present media environment where it is harder to distinguish between real and fake information, SinoInsider’s professional perspectives are much needed to make sense of a perilous and unpredictable world. ”
Liu Cheng-chuan, Professor Emeritus, National Chiayi University
Previous
Next