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Trading in shares of the Chinese real estate developer Kaisa in Hong Kong ceased


Kaisa Group Holdings City Plaza development under construction in Shanghai, China on November 16, 2021

Qilai Shen | Bloomberg | Getty Images

Trading in shares in Chinese real estate developer Kaisa was halted for the second time in two months on Wednesday as problems resurfaced in China’s real estate sector this week.

The developer was snowed in with debt problems as he had difficulty making repayments lately. It looked unlikely to meet its $ 400 million deadline on Tuesday, according to Reuters.

Kaisa ceased trading for nearly three weeks in early November after it was revealed that a payment had been missed for an asset management product.

There was no immediate reason for the recent trade freeze. Kaisa announced in late November that it would restructure its December offshore debt payments by offering investors $ 380 million in new bonds due now in 2023. The original dollar denominated bonds were valued at $ 400 million.

But last week the developer failed to secure an exchange offer with bondholders. Among other things, bondholders could buy new bonds issued by Kaisa, which could be traded for equity in some of the developer’s listed units. That failure to reach an agreement increased the likelihood of a default for Kaisa, analysts said.

Among the Chinese developers, Kaisa is the second largest issuer of US dollar-denominated offshore high-yield bonds, according to French investment bank Natixis. Evergrande, the world’s most heavily indebted real estate developer, comes first.

Kaisa shares fell about 20% in the last month.

Evergrande, whose debt crisis has surfaced in the past few months, came back into the spotlight this week as it has likely officially defaulted for the first time. There was still no news from the developer that $ 82.5 million in interest had been paid – the 30-day grace period ended Monday.

It would be the first time that the company is officially in default in this case, as it has managed to make the last interest payments at the eleventh hour – within the grace period.

However, Evergrande, the world’s most heavily indebted developer, will be pushing a debt restructuring that would include all of its public offshore bonds and private debt.

Sentiment was also bolstered by China’s move to emphasize easing. On Monday, the country’s central bank announced that it would cut the reserve requirement ratio, or the amount of cash banks must hold in reserve, for the second time this year. This will free up 1.2 trillion yuan ($ 282 billion) to fuel slowed growth amid the pandemic.

I think by and large the government understands that you are going to have some failures, but the sector as a whole continues to be a very important part of the economy.

Teresa Kong

Head of Fixed Income and Portfolio Manager, Matthews Asia

China’s real estate sector has been hit by government debt taming efforts. Evergrande’s problems came to a head after authorities introduced the “three red lines” policy last year. This policy limits the level of indebtedness related to a company’s cash flows, assets, and capital levels. That started curbing developers after years of growth fueled by excessive debt.

Other Chinese property developers – with the exception of Kaisa – also began to show signs of stress – some missed interest payments while others were unable to pay their debts altogether.

“The history of real estate in China is still intact,” said Teresa Kong, director of bonds and portfolio manager at Matthews Asia, suggesting that China’s pace of urbanization is still in its infancy.

“So there will still be many households forming, especially in the urban areas, as workers continue to migrate from the rural areas to the urban areas,” she told CNBC’s Squawk Box Asia on Wednesday. “I think by and large the government understands that you are going to have some failures, but the sector as a whole continues to be a very important part of the economy.”

Kong also stressed that local provincial governments – heavily reliant on land sales to developers – need to consider alternative sources of income.

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