Investors Have a New Default Worry in China’s Debt Market

Workers labor on the roof of a building under construction in Shenzhen, China, on Saturday, Nov. 21, 2020. China will likely return to a more "proper" range of economic development next year, Premier Li Keqiang said, indicating a strong rebound in growth after this year's pandemic slump. Photographer: Yan Cong/Bloomberg

(Bloomberg) -- Investor confidence in China Fortune Land Development Co. Ltd. is tumbling as concerns grow about its debt repayment abilities just as Beijing steps up efforts to cut risk in the real estate sector.

The mid-sized developer’s dollar bonds fell to record lows with a note due 2022 indicated at 55 cents on the dollar Tuesday morning, compared with around 92 cents at the end of last year, Bloomberg-compiled prices show. Losing 5.4% Monday, the developer’s shares have sunk 46% in the past 12 months, making it the worst performer on the CSI 300 Index.

Worries about China Fortune Land’s weak finances came as Beijing is mulling tighter controls of the industry’s financial risk caused by years of aggressive borrowing. That’s sent some of its dollar debt to distressed levels even after the firm’s parent has wired funds to pay a combined 1.4 billion yuan in early redemptions due Monday for two onshore notes.

The developer and its subsidiaries need to repay or refinance some $4.4 billion of its onshore and offshore debt this year, about 40% of its total bonds, Bloomberg-compiled data show.

“It is a lightning rod for the policy restrictions and deleveraging fears, such as the three red lines policy that curbs developers’ debt metrics, and the bank lending restrictions,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd. in Singapore. He added that investors’ concerns over China Fortune Land’s future debt repayment abilities and whether key shareholder Ping An Insurance (Group) Co. can continue its financial support also played a role in its dollar bond plunge.

“There’s concern the firm could be be the first casualty of Beijing’s policy tightening focus,” Gallimore added.

China Fortune Land didn’t immediately respond to written questions seeking comment.

China’s debt-laden real estate firms are once again under scrutiny after China Evergrande Group, the world’s most indebted developer, caused brief turmoil in the country’s financial markets due to fears of a cash crunch in late September. Beijing is now planning to expand a trial program aimed at curbing financial risk in the property sector by adding more firms to a watchlist of 12 developers that need to meet debt metrics known as the “three red lines” if they want to borrow more. Last month, regulators also took an unprecedented decision to impose caps on banks’ lending to developers.

Ping An is China Fortune Land’s second-largest shareholder so any doubt over Ping An’s support will likely scare the market, according to Zhi Wei Feng, senior credit analyst at Loomis Sayles Investments Asia. Investor patience is waning and the current bond prices reflect “extreme concern” over the company’s ability or willingness to pay, she said.