Reasons for China's real estate company's debt default | Trillions of negative cash flow | Bonds

Reasons for China's real estate company's debt default | Trillions of negative cash flow | Bonds

Reasons for China's real estate company's debt default | Trillions of negative cash flow | Bonds

China’s real estate bubble is about to burst | Full story On October 4, Chinese luxury real estate developer Fantasia Holdings fails to pay $206 million in debt due. On October 3, the $260 million dollar note from Jumbo Fortune Enterprises matured. The dollar note is guaranteed by China Evergrande Group and its unit Tianji Holding Ltd. On October 4, China Evergrande and Evergrande Property announced the temporary suspension of trading without prior warning before the opening of the Hong Kong stock market. Evergrande has defaulted on the maturity interest of two US dollar bonds in late September, involving amounts of US$83.5 million and US$47.5 million respectively. Of course, these are not the only ones that face such challenges. According to the "Times Weekly" report, as of September 5 this year, a total of 274 real estate companies in mainland China have issued bankruptcy announcements. In 2020, 408 real estate companies issued bankruptcy announcements. The reason for the bankruptcy of mainland real estate companies is generally because of the rupture of the capital chain, resulting in debt defaults. In August last year, the Chinese authorities set "three red lines" for real estate companies and restricted their financing according to the number of red lines they stepped on. Secondly, at the end of last year, the authorities also set the ratio of bank loans to developers’ own funds for real estate projects; Furthermore, since the beginning of this year, the CCP has continuously upgraded its "control" on real estate industry, controlling the housing market from the demand side, causing the rapid cooling of the market. Thus, the desire of real estate companies to speed up the sale of properties to collect the money has been dashed. The financing of real estate companies is restricted, the method of lending the new to repay the old is also blocked, and properties are generally not easy to sell. Therefore, many real estate companies’ capital chains were broken. Most of China's real estate companies quickly expand up through a high borrowing and high turnover approach, their leverage ratios are relatively high. For example, the real estate company that ranked first in sales in September- Country Garden, starts project design immediately once it acquires land plots, opens for pre-sale within 4 months, achieves positive cash flow in the 5th month, and starts to rush into a new land acquisition in the 6th month. This kind of high turnover becomes the way to maximize the interests of real estate enterprises. Under this business philosophy, the net operating cash flow of real estate companies has always been negative as a whole. In 2014, the net cash flow of all real estate companies was as high as negative 884 Billion USD. Since then, China has been forced to start destocking to improve cash flow for the real estate industry. By 2018, the net cash flow was negative 590 billion USD. By 2020, the net cash flow has deteriorated again and reached a negative 714 billion. From January to August this year, the number is negative 512 billion, and it is expected to exceed negative 776 billion USD for the entire year. Driven by greed, real estate companies do everything they can to expand rapidly, and their cash flow has always been negative. How can these companies not collapse? #ChinaRealEstate#DebtDefault#ChinaEconomy#BillDue#CapitalMarket#RealEsateBubble#CashFlow#TrillionDollar