2023-08-20 12:02:00
Asset management company that reduced funds of real estate developer, only damage amounted to 18.8 billion won
Impact of biguiyuan default, possibility of contagion of financial market crisis
“Hengdai’s real estate company’s bankruptcy… The Chinese government’s stimulus package doesn’t work”
Residential buildings with the logo of real estate developer Hengda (Evergrande) painted are lined up in Nanjing, Jiangsu Province, eastern China, on the 18th. On the 17th (local time), Hungda filed an application with the Manhattan Court in New York for the application of ‘Chapter 15′, which is designed to protect companies from creditors’ demand for debt repayment and lawsuits. AFP · Yonhap News
The real estate crisis, which began with the default of Biguiyuan (Country Garden), a Chinese real estate developer, is spreading to the Chinese financial sector. As the Chinese trust company Zhonglong, which invested in real estate development, stopped redemption, there are concerns that a ‘Chinese version of the Lehman Brothers crisis’ may occur.
The Wall Street Journal (WSJ) reported on the 18th (local time), referring to the suspension of redemption by Chinese asset management company Zhonglong International Trust. Zhonglong International Trust, an affiliate of the financial group Zhongzhi Group, is one of China’s top 10 trust companies with assets under management of US$108 billion as of the end of last year.
Zhonglong International Trust recently suspended interest and principal repurchase of dozens of investment trust products. The amount of damage from redemption suspension alone reached 14 million dollars (18.8 billion won), as revealed by the exchange disclosure of the three listed companies that entrusted money to the four funds of Zhonglong International Trust. On China’s social network service (SNS), complaints from investors who have not been paid for their investment are also posted.
Trust companies in China have been a source of financing for real estate developers. It is known that Junglong International Trust also invested a significant portion of its trust funds in real estate. The suspension of redemption by Zhongrong Group in conjunction with Biguiyuan’s default is raising anxiety regarding China’s financial system.
Xiaoshi Zhang, a researcher at Gavecali Research, said, “Zhonglong’s parent company, Jungji Group, is like a ‘black box’. “Since it is an unlisted company that does not make regular disclosures, some investors do not even know what assets they are investing in.” “The concern is that the ‘Lehman Moment’, which threatens the soundness of China’s financial system, is beckoning,” he said. However, he assessed that “it is unlikely that a crisis will actually occur due to the vigilance of the regulators.”
Nomura Securities also said in a recent report, “The risk exposure of Chinese trust funds in the real estate sector is currently under great threat.” can be increased,” he said.
Real estate in China is the biggest source of finance for local governments. Because of this, when real estate prices fall, a vicious cycle can occur: depletion of financial resources by local governments → reduction in fiscal spending → increased unemployment due to economic recession → increased possibility of a financial crisis.
The fact that Hengda Group, which was in financial trouble following declaring default in 2021, applied for bankruptcy protection in the United States is also a factor fueling market unrest. According to foreign media, Chinese real estate developer Hengda filed for bankruptcy protection under Article 15 (Chapter 15) of the Bankruptcy Protection Act in New York on the 17th (local time). Chapter 15 is a procedure to protect assets from debt repayment claims and lawsuits from creditors in the United States when foreign companies seek reorganization. Hengda has yet to file for bankruptcy protection in China, which is interpreted as an attempt to reconcile its overseas debt first.
Han Kwang-yeol, a researcher at NH Investment & Securities, said, “Starting with Hengda Group, real estate companies such as Zhao Jiaoye and Greenland Group continue to go bankrupt.” Considering the declining buying sentiment and the need to ease competition in the real estate market through restructuring, credit events for real estate companies with high debt burdens and low competitiveness are highly likely to continue for the time being.”
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