Default of State-Backed Developer Sino-Ocean Signals China’s Economic Crisis: Analysts

Unfinished apartment buildings stand at a residential complex developed by Jiadengbao Real Estate in Guilin, Guangxi Zhuang region, China, on Sept. 17, 2022. (Eduardo Baptista/Reuters)

The latest default on debt by a state-backed real estate enterprise in China signals a growing crisis in a crucial sector for that nation’s economy, said analysts.

China’s state-owned developer Sino-Ocean Group Holdings missed interest payments by Aug. 13, according to a filing (pdf) on the Hong Kong Stock Exchange.

Sino-Ocean suspended trading of 6 percent guaranteed notes due in 2024 due to non-payment of interest of $20.94 million for the period from Jan. 30 to July 30, read the filing.

Analysts believe that when the state-backed developers also show financial woes, it signals the fall of what had been the Chinese economic growth engine, and it is likely to drag down the entire Chinese market.

The Falling Engine

The sluggish Chinese economy has manifested itself in the real estate sector.

Earlier, Sino-Ocean missed paying the principal and interest on $278.8 million worth of bonds with a coupon rate of 4 percent that was due on Aug. 2.

Sino-Ocean Group is the second Chinese state-owned real estate company to default on the dollar bond recently.

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Earlier in July, Shanghai-based Greenland Holding defaulted on its 6.75 percent June 2024 bond worth $432 million.

China’s largest private real estate developer Country Garden also issued a profit warning (pdf) on Aug. 10 of a loss between $6.2 billion and $7.6 billion for the first half year for misjudging market conditions. Chinese media reported that the company planned to initiate a debt restructuring process, a sign to avoid default.

The U.S.-based economist Davy Jun Huang said China’s economy is largely state-owned, while the private sector and rural collective economy are only secondary. He said, “The state-owned enterprises’ default means the entire Chinese economy is at risk,” whereas private business performance is just part of the market behavior.

Unfinished apartment buildings at the Phoenix City residential project, developed by Country Garden Holdings Co., in Shanghai, China, on Jan. 17, 2022. (Qilai Shen/Bloomberg via Getty Images)

A general default of the Chinese real estate sector, both state-backed and private, has caused panic. “The real estate defaults are not isolated cases, rather a superposition of the stagnant Chinese economy,” said Mr. Huang.

He said China’s economy relies heavily on external demand such as global trade. He has little hope for any recovery of the real estate sector even if Beijing steps in with the domestic monetary policy changes, considering China’s current status in the international community.

He doesn’t believe there’s a way to save the Chinese market even though the regime has come up with a number of measures such as reducing loan interest rates.

A Total Liquidation

The Taiwan-based financial expert Huang Shicong said the default is a manifestation of a real estate liquidity problem, an exploding and widely spread phenomenon in China.

The prolonged stagnant property market will radiate to a number of other industries, deepening the Chinese economic crisis, he said, adding that it will consequently devastate the job market and the GDP.

He said it’s just a process of the Chinese market—after exuberant growth with a property sector that has overextended itself over the past 30 years—coming to a total liquidation. “The magnitude and scale are way beyond our expectations and imagination,” he said.

The total assets of the Chinese real estate market were estimated at around $50 trillion, and he said the grand scale isn’t something the regime can easily take care of.

He said, “It’s like a bottomless pit,” but in the end it would badly hurt the Chinese financial sector.

Xia Song and Yi Ru contributed to this report.