Hidden Chinese Property Debt Is Spooking Bond Holders And Sparked A Bank Run

A tear-down of an insurance giant’s real estate liabilities mirrors other troubling reports across China’s banking sector right now showing the extent of hidden debt entanglement among financial firms.

Private equity, led by Ping An Insurance Group of China Ltd’s PNGAY real estate subsidiary, is Chinese property’s new “hot potato”, writes Bloomberg columnist Shuli Ren.

Ren’s commentary published in a Bloomberg op-ed Monday mirrors deeper concerns being reported across China’s banking sector right now.

Ren points out that a 2 billion RMB ($274 million) bond issued by Ping An Real Estate Co. Ltd has been see-sawing lately as investors grow nervous about the company’s ability to repay. In late August, the bond was yielding as much as 30%. By early September it had risen again to yield just 10% but has been declining in value since and is now offering an 18% yield.

Ren points out that the real estate subsidiary of China’s largest insurer held around 10 billion RMB in cash which is enough to cover just half its interest payments over the next 12 months.

While it is possible that the parent company could step in to repay, the firm’s sales have been on a sharp decline since hitting a high in 2021, posing questions about its ability to do so. In the second quarter of this year, Ping An’s revenue was 284.1 million RMB vs. 933.1 million RMB for the same period two years ago.

Further, there are unanswered questions about the company’s off-balance sheet debt. Recently, the China Securities Regulatory Commission (CSRC) found that the real estate subsidiary had covered up a 200 million RMB overdue debt tranche in a new bond filing.

The company’s joint venture partnerships enabled it to borrow cash for years without declaring any increase in leverage, writes Ren. She gave the example of Shenzhen Anchuang Investment Management Co., a vehicle in which Ping An Real Estate holds a 49% stake which was used to heavily gear the firm’s property transactions. Last year, Angchuang had 17.8 billion RMB in loans on its books.

The scenario highlights the extent to which there are hidden problems potentially to the tune of billions of dollars that are not on investors’ radars just yet.

Ping An Insurance has invested 17 billion RMB in its real estate unit from 2014 to 2022, and bears the same name. A collapse of the real estate arm could spark a broader contagion in the financial services sector overall in China.

The observation of firms using off-balance sheet debt in private equity joint-venture partnerships adds a new layer of risk to the increasing troubles in the Chinese property sector. As firms such as China Evergrande Group EGRNF and Country Garden Holdings Company Limited CTRYF face collapse, fear is high among investors and savers that the contagion could be sparked elsewhere.

The entanglement of off-balance sheet property loans and beleaguered banks and insurance companies is reminiscent of the unravelling of US subprime, when banks such as Citigroup Inc. C, Goldman Sachs Co. GS and Morgan Stanley MS as well as insurers such as American International Group Inc AIG all had to be bailed out by the government as the extent of their interconnected liabilities became known.

Over the weekend, Asia Times reported that Cangzhou Bank was facing a bank ran among its customers throughout last week as savers feared that their money was at risk due to potentially over-extended loans made to China Evergrande.

Evergrande owes Cangzhou around 3.4 billion RMB, according to reports. Cangzhou disputes these amounts, saying that it is owed just a tenth of this amount and that loans are guaranteed by properties.

But last year, in a similar scenario, a large loan was taken out via a Ping An joint venture with Zhenro Properties Group Limited in which the insurer was effectively a guarantor. Ultimately, when the loan fell due and Zhenro was unable to pay the banks came knocking on Ping An’s door. Ping An argued then that the loan was collateralized against a property and hence was not its responsibility to repay.

Further, China Life Insurance Company Limited CILJF has allowed its own real estate subsidiary Sino Ocean Group Holding Ltd SIOLY to unravel as billions in liabilities have had to be renegotiated with creditors. Monday, Sino Ocean goes to its creditors to ask for a delay in interest payments of a 3 billion RMB 10 year bond after freezing payments on $4 billion of offshore bonds in September.

In Cangzhou’s case, the bank resorted to putting up a physical wall of cash last week in its branches to assure savers that their money was safe. The cash wall seemed to have little effect in assuaging their worries however, according to Asia Times, and long queues of depositors lining up to make large cash withdrawals were noticeable in branches across the country well into Saturday.