Shimao received a liquidation request from a Chinese bank, an extremely rare occurrence.
China’s real estate sector receives another blow as Shimao Group, one of the country’s largest developers, is hit by a liquidation petition. The lawsuit was filed in Hong Kong by China Construction Bank (CCB), one of the “big four” financial institutions in the country.
The real estate crisis started in 2021 when Evergrande, then China’s largest developer, defaulted on its offshore obligations. What followed was a year-long battle for survival, eventually ending with Evergrande’s liquidation as ordered by a Hong Kong court.
Evergrande’s fall started a domino effect across the entire Chinese economy. Country Garden, another property giant, also faces a liquidation order in May.
Shimao is also among China’s largest real estate developers. Among others, Shimao owns several ambitious projects like the Xiamen MO skyscraper complex and the Hyatt on the Bund Shanghai hotel.
Like many others, Shimao too defaulted on its debt after failing to repay a $1 billion obligation in 2022. Following the missed deadline, Shimao defaulted on its entire $11.7 billion debt portfolio.
A restructuring plan laid out by Shimao in March received backlash from investors and creditors as it requires significant upfront payments for few guarantees of success.
"I believe each creditor will seek to work in their own best interest to recover as much as possible, given that the business of the company is no longer viable," said senior credit analyst at Lucror Analytics Leonard Law.
Law said he believes Monday’s lawsuit is a way of pressuring Shimao to offer better terms to creditors.
Lack of political will
CCB’s liquidation request comes after a missed $202 million domestic bond deadline. Although legitimate, it’s extremely rare for a Chinese bank to hit a domestic property developer. Other similar petitions were often launched by overseas banks instead.
However, Chinese institutions have always treated the country’s real estate crisis with disdain. The Chinese Communist Party (CCP) often rebuked indebted property developers, saying they should go bankrupt when they cannot afford to repay their obligations.
Since 2018, the party’s principal motto has been “Houses are for living, not speculation”.
In fact, the real estate crisis itself was partly caused by government intervention. In August 2020, Beijing introduced three “red lines”: harsh requirements for Chinese businesses. Failing to remain within the specified boundaries would deny access to further debt.
Evergrande was already above two of the three “red lines”, and about to cross the last one too. When that eventually happened in 2021, Evergrande could not take on any more debt and went into default.
It is therefore clear the CCP will encourage developers to go bankrupt instead of bailing them out. It now seems that Shimao has the target painted on its back.
