Kaisa threatens bankruptcy: China's construction companies shock the economy

Joseph Lau is a man who knows his industry.

Since the Hong Kong resident stepped into his future gold mine called Chinese Estate in the mid-1980s, he has built a few of the most important buildings on the island, such as The One shopping center on the Kowloon Peninsula.

The Lau family's fortune is now estimated at a good $ 13 billion.

Hendrik Ankenbrand

Business correspondent for China based in Shanghai.

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Soon, however, wealth could shrink somewhat. An investment by the Laus, which they bought for $ 300 million just a few months ago, threatens to become a depreciation item. On November 11, the coupon payment is due for the bond from Kaisa, which the Chinese real estate developer had made palatable to billionaires with its generous annual interest of 11.7 percent. But on Monday, Kaisa asked his investors, including the louse, for “more time and patience”, as liquidity is currently scarce.

So now also Kaisa.

The Chinese real estate developer Evergrande, which has debt of over 300 billion dollars, has been keeping the financial markets in suspense for months.

Should the company go bankrupt, it could trigger a chain reaction in the real estate industry, which is so important to China's economy.

The US Federal Reserve (Fed) considers it dangerous enough that it warned on Monday that an overturning of China's real estate giant could not only put a strain on the financial system of the second largest economy, but also on Wall Street and the global economy as a whole.

The Fed prepares the status report that received the warning twice a year.

It shouldn't be long before the situation in China worsened.

Successful on paper

After Kaisa's desperate call for help became public, bonds from Asian real estate developers fell again in value at the beginning of the week. The fact that Kaisa actually became the first Chinese company to go bankrupt in 2015 and could no longer service a bond issued in dollars abroad did not help the mood. After billions had disappeared from the company's coffers in a mysterious and never fully clarified way, Kaisa made an equally puzzling comeback two years later and, unlike Evergrande, was considered healthy, at least on paper, until recently that the company came to light had been busy collecting money from his balance sheets for years in China's notorious shadow banking system.

Perhaps even more than Evergrande, the Kaisa case has what it takes to unsettle the financial markets about the hidden risks that lie dormant in China. In the past few days, analysts have shown themselves to be shocked that Kaisa had assured its investors at the end of October that everything was in perfect order in terms of liquidity. The “three red lines” drawn by the Chinese government a year ago, which set strict requirements for the amount of debt in relation to equity, had only brought Evergrande into trouble because the banks cut off the group from new loans after the values ​​were exceeded had.

Kaisa, on the other hand, notes Hong Kong industry observer Shuli Ren, was still below the limit values ​​in June “and looked great”.

The company was even able to successfully place a bond in mainland China with a volume of 300 million yuan (EUR 40 million) - at a remarkably low annual interest rate of 7 percent for a company in the controversial Chinese construction industry, which was itself a few years earlier had become insolvent.

The "three red lines" don't help

A week ago, however, Kaisa warned that it would not be able to make interest payments on so-called “wealth management products”, which most investors probably did not even know existed. These investment vehicles, often sold through banks to private investors at suspiciously high interest rates that sometimes approach 20 percent, have already driven tens of thousands, perhaps even more, angry Chinese into the streets in recent years than those who were good after the debtors' bankruptcy Had lost part of their property.

It is well known in the country that the real estate industry has been partially financed through wealth management products for years, thereby helping China's so-called shadow banking system to take on a new size.

Nevertheless, the financial markets in China are now reacting in shock.

The stock exchanges in Hong Kong and Shanghai were able to stabilize again after slumps on Wednesday.

But the realization that despite Beijing's “three red lines” there are more “ugly monsters” hiding in the balance sheets of the construction giants, as Shuli Ren calls them, could not keep the next price slump waiting long.

This also applies to financial centers outside the People's Republic.

After all, Kaisa is the company with the highest foreign debt in China's real estate industry - ahead of Evergrande.