China Property Pain Worsens With Failed Auction, Sino-Ocean Rout

(Bloomberg) — Fresh signs emerged Wednesday that China is facing yet more challenges in its property debt crisis.

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Defaulted developer Shimao Group Holdings Ltd. failed to find a buyer for a $1.8 billion project at a forced auction, even at a heavy discount. Sino-Ocean Group Holding Ltd. saw its bonds tumble on news that the state-backed builder told some creditors it’s been working with two major shareholders on its debt load.

They’re the latest indications that China’s two-year real estate crisis is likely to remain one of the biggest drags on the world’s second-largest economy. A brief rebound after the nation scrapped Covid restrictions has quickly faded, with home sales resuming declines and property investment worsening — hurting markets ranging from iron ore to high-yield bonds.

“Investors are disappointed with the slow recovery of the housing market,” said Anitza Nip, Union Bancaire Privee’s head of fixed income research for Asia. “The recovery path appears to be even longer than what the market had initially anticipated earlier this year.”

The nation’s second-largest developer by sales, China Vanke Co., said last week that the home market is “worse than expected,” joining a chorus of investors and analysts who have become bearish on the sector. Goldman Sachs Group Inc. recently raised its projected default rate for Chinese high-yield property dollar bonds.

No buyers bid for Shimao’s land portfolio in Shenzhen, even though the asset was offered at a price 20% lower than its appraised value, according to results posted on online auction site JD.com.

That will likely add hurdles to Shimao’s debt restructuring, Bloomberg Intelligence property analysts Kristy Hung and Lisa Zhou wrote in a note. The developer’s onshore commercial property unit purchased the land — spanning an area equivalent to 34 football fields — in 2017 for 24 billion yuan ($3.3 billion), a record in Shenzhen at the time.

Its original plan was to build a landmark complex with a 500-meter skyscraper, but the project ran into trouble last year after the company missed some payments on high-yield trust products used to fund the construction. Citic Trust Co., which manages the trust project, seized the asset and sued Shimao’s unit, according to the auction documents and Shimao’s company filing.

Meanwhile, China Life Insurance Co. and Dajia Life Insurance Co. sent a working group to Sino-Ocean regarding a holistic risk mitigation plan, people familiar with the matter said. That added to concerns that even China’s state-backed developers aren’t immune to the industry’s unprecedented liquidity squeeze.

Sino-Ocean bonds slumped further Wednesday, putting prices at just half their start-of-week levels. A 2 billion yuan onshore note due next month, the company’s next maturity, plunged 34.6% and saw trading suspended twice. A Sino-Ocean dollar bond due 2024 fell to a record low at about 15 cents. Shares dropped as much as 4.4% in Hong Kong.

This week’s bond selloff at Sino-Ocean was kicked off by people familiar with the matter saying that a state-owned shareholder-led working group of the developer had engaged China International Capital Corp. to conduct due diligence on the firm.

China’s renewed housing slump has fueled expectations for the government to issue more stimulus measures. Adding to the economy’s woes, figures on Wednesday showed China’s services sector slowed in June.

Yet support measures have so far been modest, keeping pressure on developers facing mounting debts.

“Investors are concerned not only about credit risk on individual names now, but also about the sector as whole as the restructuring process remains slow,” UBP’s Nip said.

–With assistance from Pearl Liu.