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Until now, no matter how bad things got, Chinese property developers could rely on state-owned lenders to support them. That can no longer be taken for granted with state-owned China Construction Bank (CCB) taking rare legal action against troubled mainland developer Shimao Group. However, it is good news for bank investors.
Shanghai-based Shimao, which has about $11.7 billion in external debt, said on Monday that China Construction Bank had filed a liquidation petition against it in Hong Kong over its failure to repay $200 million in loans. Shimao's $11.7 billion offshore debt is already in default after missing interest and principal payment on a $1 billion offshore bond in 2022.
Shimao's Hong Kong-listed shares fell 19 percent to a record low on Monday despite its pledges to oppose the lawsuit, signaling surprise over the lender's unusual move. Shimao wants to continue with the proposed restructuring plan.
But now is the time for lenders to take a stronger stance. As China's real estate crisis enters its fourth year, most of the burden of providing additional loans to distressed and high-risk developers has been borne by the four largest domestic banks: China Construction Bank, Bank of China, Agricultural Bank of China, and Industrial and Commercial Bank of China. China (Industrial and Commercial Bank of China). Lenders' margins were hit when they cut lending rates, including reductions on outstanding mortgage rates. Regulators have reportedly looked into allowing banks to offer short-term, unsecured loans to developers for the first time.
Historically, these large banks have been called upon to bail out distressed companies in times of distress, such as by buying stakes in troubled local banks and providing more bailout loans to developers so they can complete unfinished housing projects.
But as the crisis lasted longer than expected, loan yields began to decline and profit growth slowed, even as total assets at local lenders increased by a tenth last year.
Shares of the Industrial and Commercial Bank of China, the largest state-owned bank, rose by a fifth last year. However, it still trades at just 0.4 times its tangible book value, a fraction of its regional peers. This discount reflects concerns about the potential increase in bad loans. Its residential mortgage bad loans actually rose 9.6 percent to RMB27.8 billion ($3.8 billion).
Defaults by Chinese developers have exceeded $110 billion over the past three years. There is a limit to how much local banks can absorb.
june.yoon@ft.com
