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Until now, no matter how bad things got, Chinese property developers could count on state-owned lenders to have their backs. That can no longer be taken for granted with state-owned China Construction Bank (CCB) taking rare legal action against the troubled mainland developer Shimao Group. It is, though, good news for bank investors.
Shanghai-based Shimao, which has about $11.7bn of offshore debt, said on Monday that CCB had filed a liquidation petition against it in Hong Kong over its failure to repay loans of $200mn. Shimao’s $11.7bn worth of offshore debt is already in default following its missed interest and principal payment for a $1bn offshore bond in 2022.
Shimao’s Hong Kong-listed shares fell 19 per cent to a record low on Monday despite its vows to oppose the lawsuit, suggesting surprise over the lender’s unusual move. Shimao wants to continue with its proposed restructuring plan.
But now is a good time for lenders to take a stronger stance. With China’s property crisis in its fourth year, much of the burden of making additional loans to troubled, high-risk developers has been shouldered by the four biggest local banks: CCB, Bank of China, Agricultural Bank of China and Industrial and Commercial Bank of China (ICBC). Lenders have taken a hit to margins as they lowered lending rates, including reductions on outstanding mortgage rates. Regulators have reportedly looked at allowing banks to offer unsecured short-term loans to developers for the first time.
Historically, these large banks have been called on to bail out struggling companies during times of distress, such as through buying stakes in troubled local banks and offering more bailout loans to developers so they can complete unfinished housing projects.
But with the crisis lasting longer than expected, loan yields have started to fall and profit growth has slowed, even with total assets at local lenders increasing by a tenth last year.
Shares of ICBC, the largest state-owned lender, are up a fifth in the past year. Yet they still trade at just 0.4 times its tangible book value, a fraction of that of its regional peers. That discount reflects concerns over the potential for an increase in bad loans. Its bad loans from residential mortgages have already risen 9.6 per cent to Rmb27.8bn ($3.8bn).
Defaults by Chinese developers have exceeded $110bn over the past three years. There is a limit to how much more of that local banks can absorb.
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