China's Solution To “Property Companies Facing Huge Debt Burdens”: Much More Debt

Tyler Durden's picture

As reported earlier, China's stock market blasted higher overnight to the best level in seven months driven by the country's financial sector and especially its property developers. WSJ summarized the sudden buying frenzy: "as a slowdown hits China's real-estate market, investors are turning bullish and buying up stocks of large property developers on bets they will not only ride out the storm but also grow bigger. The MSCI China Real Estate Index has surged 16.5% since the start of July, on track for its best month in nearly three years, as local governments have started to ease housing purchase restrictions to boost sales."

Shares in some of the larger companies though have performed well with China Vanke Co., the country's biggest developer, up 22.7% this year and another large builder, Evergrande Real Estate Group Ltd. climbing 17.2%. This despite a warning by the same China Vanke two short months ago that the "Golden Era" For Chinese Housing Is Over.

However, aside from easing purchasing curbs which refute any stated government intentions to rein in the China's epic housing bubble following several months in which property prices and transactions tumbled, the real reason, as reported by Bloomberg: China’s government is once again authorizing developer debt sales for the first time in five years in a bid to avoid bankruptcies as the property market cools.


The pressure on Chinese real estate companies was underscored by the collapse in March of Zhejiang Xingrun Real Estate Co. Developers including China Vanke Co., the nation’s biggest, and Greentown China Holdings Ltd., the largest in the eastern province of Zhejiang, have cut property prices since then to boost sales. The slump comes as economic growth is set to cool to 7.4 percent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg.

So it was only logical that with China's attempt to normalize its epic credit bubble going horribly wrong, everything would be put on halt or rather, in reverse:

Jiangsu Future Land Co. a builder of homes in eastern China, sold 2 billion yuan ($323 million) of five-year AA rated bonds last week to yield 8.9 percent. That’s less than the average 9.73 percent on trust products that many developers relied on for financing after authorities stopped approving onshore note issuance in 2009.


The China Securities Regulatory Commission reversed course in April when it granted four real estate companies the right to sell the securities, after the collapse of a builder south of Shanghai the previous month underscored financing strains. The government allowed the first mortgage-backed debt sale since 2007 last week, in the latest step to ease restrictions on the industry as new home prices drop in a record number of cities.


“The issuances are obviously an easing signal,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “The CSRC will probably approve more note sales as long as developers have fund-raising demand. It would be helpful because bond costs are lower than trusts.”


The move to allow Chinese builders to tap the onshore note market, instead of raising funds from so-called shadow-banking products such as trusts or through international bonds, parallels the first regulatory approvals for new-stock sales in about four years. The CSRC said in March that Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. were allowed to sell yuan-denominated A shares in private placements.


Jiangsu Future Land said it will spend the proceeds from its bond sale to repay bank loans and replenish working capital, according to the prospectus. Tianjin Realty Development said it will use the money it raised to invest in a lower-cost housing project and repay borrowings.

But mostly it was to "extend and pretend" that the company is viable even as revenues tumble, and the only source of funding is, drumroll, debt.

In other words, China has figured out - yet again - what the Fed discovered back in 2009, namely why try to fix a problem created by ridiculous debt loads when one can just kick the can, and add even more debt?

As for the punchline:

“Property companies are facing huge debt burdens,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. “If the regulator hadn’t eased, there probably would have been more defaults.”

Or, translated: if the companies weren't allowed to "fix" their huge debt burdens with even more debt, it would have been a catastrophe.

Finally, here is why China is once again stuck injecting record amount of debt into its market:

“The revival of property bonds is the right move in the long run,” given real estate’s close ties to many industries including cement, steel and even banking, said Chen in Shanghai. “Property is the single most important sector to the Chinese economy.”

Indeed it is, with 75% of Chinese household wealth coming form the real estate sector (unlike in the US where this is flipped and it is all in the stock market and other financial assets). Which means that any hope that China would have done the right thing and burst the bubble in a controlled fashion are now gone forever. The only question is how much longer can the breakneck speed of bubble expansion in both housing and credit continue (something the Politburo was terrified of last summer) before everything collapses only this time the government will no longer be able to support the house of cards.

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ekm1's picture

No biggie.

Politburo will ask the military to shoot at people after they promise more mansions to military leaders.


China solves problems very easily as long as food inflation is contained.


One thing China can't handle: FOOD INFLATION. The rest is easy

NotApplicable's picture

It's okay. We owe it to ourselves, after all.

NoDebt's picture

Spanish 10 year @ 2.5% or Chinese "AAA" property developer bonds @ 9%........ decisions, decisions.

You pretty much have to go for the yield, don't you?

BandGap's picture

Upside down fruit cake in a blender for $500 Alex.

This has to be the week this shit discombobulates.

Downtoolong's picture

Oh come on now, in the distant future these projects will be among the greatest wonders of the world.

Of course, the question won’t be how they did it, but, why?

fzrkid's picture

Paying debt with more debt.. Has worked for uhmarikah for decades..


The key is dont be the first one to fail. This way you can blame the 'OTHER' guy when SHTF and it is DTBWYC

astoriajoe's picture

Its like playing musical banks.

darteaus's picture

Just make sure that a chair is open at the Fed table when the music stops.

TideFighter's picture

Why don't they just sell to Belgium - I hear it's a really hot market there.

highly debtful's picture

Don't come knocking on our door, we're tapped out. After all those US treasury bonds, I don't think we can handle China right now. Maybe in half a year or so.  

Bangin7GramRocks's picture

"Or, translated: if the companies weren't allowed to "fix" their huge debt burdens with even more debt, it would have been a catastrophe."
The entire world financial system in a nutshell. We are all so fucked!

novictim's picture

Only folks dealing with "other peoples money" continue to play the endless game of Chinese Russian roulette.  That is the game where you are handcuffed to a chair and  someone then takes bets on whether they will blow your head off.  Everyone hears the spin of the chamber and they call it a "financial report". 

The crowd audience are all Chinese oligarchs. 

The fool in the chair are the international investment funds.

The bullet in the chamber will be the first institution to call in large portions of its loans to China.

The bang will be heard around the world.

Get your money out of that chair!


Never One Roach's picture

Gubmints refuse to let markets correct. They keep propping them up higher and higher with less foundation. Gonna be nasty when it all collapses. Very nasty with tons of debt .

orangegeek's picture

that high rise building lying on its side cracks me up


good job china

gcjohns1971's picture

And why are we supposed to believe that China and Russia INTEND to establish a fair 'HARD' currency based on precious metals???

When ALL OF THE EVIDENCE INDICATES that they simply will continue the same BANKSTER scam as the US, London, & West generally????????????????

allgoodmen's picture

They will, but it's not for the west. After the western bubble pops and China nationalizes all the western owned factories to pay back the worthless t bills, they will have a complete and wrking economy, not to mention all the gold, as opposed to the west which has no production capacity except to print dollars, social media stock certs and sternly worded letters.

intric8's picture

DONK! Good luck selling units in the other buildings

mastersnark's picture

I tried this exact same argument with my credit card issuers, give me a limit increase so I can afford to live, and they told me I was crazy and asked if "would I accept service of the summons and complaint" whatever that means.

Man, I wish my credit cards were issued by these reasonable Chinese dudes. 

novictim's picture

We've all heard of the Chinese Firing squad:  Riflemen form a circle to shoot the prisoner. 

Now we have the Chinese Lying Squad:  Chinese banks form a circle to shoot lies at Western capital investment fund managers.

If it were not for the fees and the fact that "its not their money", that investment money would be long gone from the Chinese market.  It is all one global cesspool of corruption.

edifice's picture

I don't see why China builds multiple ghost cities? Why not just continuously build, demolish, and rebuild one or two?

Lordflin's picture

Because you never know. The ghosts may move in and start paying rent.

NotApplicable's picture

Somebody here posted this link recently that at least partially explains the issue.

Although I'm sure there's also the reality that these cities are no different than GM's channel-stuffing. In other words, pure Keynesian jobs programs to keep the "money" flowing.

Or in other, other words, "classic malinvestment."

shovelhead's picture

Chinese bankers get nervous with millions of construction workers with nailguns running around.

Better to keep em busy.

KnuckleDragger-X's picture

Well that's the way the Russians would have done it and truth be told, the Chinese and the Russians really don't like each other. Besides, this is way more shiny.

windcatcher's picture


China has as many PhD. crack-pot economist as we do. Oh, we have a chart that shows the projection! At least they are smart enough not to go to the western banksters for a loan.


Seek_Truth's picture

And just like our PhD economists, their sheepskin isn't worth a freebie from a Cracker Jack box.

snakedogs's picture

The world is full of Charles Ponzi's selling each other

their paper as the slaves tweet!