Courts in Hong Kong heard four liquidation suits against Chinese developers from their frustrated creditors last week, a record number of cases to hit the courts at the same time.
The liquidation surge spells more trouble for the Chinese real estate market, which has been tottering on the verge of collapse for years.
The four developers hauled into court last week were Kaisa Group Holdings, Shimao Group Holdings, Redsun Properties, and DaFa properties.
All four were granted temporary reprieves from liquidation, but the longest grace period the courts extended was seven weeks. Kaisa Holdings was bluntly told there would be “no excuse” for giving it another extension. Court observers noted that the restructuring terms are getting worse with every extension.
The South China Morning Post (SCMP) noted on Monday that several other Chinese developers are facing their own impending hearings or have already been ordered to liquidate their assets to repay creditors, including at least one state-supported enterprise.
Glen Ho, a specialist at the international auditing and consulting firm Deloitte, anticipated “a second wave of restructurings from 2025 onwards” because there will probably be “no significant improvement in sales or the confidence of home buyers.”
A faint hope for the Chinese property industry is that many of these liquidation demands from creditors are probably strategic. In other words, the creditors will not actually force the developers to sell off their assets and dissolve – the liquidation suit is an effort to pressure the developers into getting more serious about paying their overdue bills.
The bad news is that the tactic might not work. Creditors are desperate for cash with the global economy sputtering but Chinese developers are even more desperate because their asset values are tumbling and Chinese consumer confidence is near all-time lows.
The Wall Street Journal (WSJ) observed in June that China’s housing market does not appear to be responding to massive government stimulus measures enacted this year. Investors and individual home buyers “remain cautious” and home prices are still tumbling.
Retail home sales showed only “subdued” growth even though the Communist central government just tossed out $138 billion in “ultra-long sovereign bonds” and $41 billion in funding for “re-lending programs.”
The latter program is supposed to help state-run enterprises buy up distressed real estate so that Chinese consumers see all those cobwebbed “For Sale” signs disappearing and conclude it is once again safe for them to invest in property. $41 billion in re-lending funds turned out to be not nearly enough to rekindle consumer confidence in home purchases.
“The market still doesn’t appear to have found a floor, even after Beijing rolled out its most aggressive stimulus measures so far in mid-May in hopes of restoring confidence,” the WSJ said, pointing to disappointing April figures from China’s National Bureau of Statistics.
The Financial Times (FT) warned last week that “China’s big housing correction is not over.” Housing sales are sitting at about half of their peak from three years ago, new home starts are at a third of the peak, and real estate as a share of gross domestic product (GDP) is hovering at a 15-year-low.
The FT piece dismissed one of the common explanations for China’s housing doldrums, namely that the central state overreacted in its bid to stamp out market speculation by making it too hard for investors to buy property and said some other “often-cited reasons” like pandemic hangover and weak consumer confidence are “plausible,” but a more “fundamental” problem is that urbanization stalled out.
When Chinese workers were flocking to big cities and demanding big apartments during boom times, the real estate market was on fire. Urban populations are still increasing, but the rate is less than half of its peak at the turn of the century. Expensive construction projects faltered with buildings half-completed, unleashing the fury of angry consumers in the “mortgage revolt” of 2022, while developers struggled to sell existing inventory at discount prices.
As FT noted, many market observers are skeptical that China can synchronize housing supply and demand without spending a great deal of subsidy money that Beijing doesn’t really have. The urban housing market picked up in June, but it looks more like a downturn easing than a vibrant recovery. The wave of liquidation cases rolling into Hong Kong courts suggests that creditors might not be willing to wait for a robust recovery much longer.