Last week, China Construction Bank (Asia), the Hong Kong division of one of the country's largest state lenders, filed a winding-up petition at the High Court of Hong Kong against the well-known Chinese property developer Shimao Group.
The step is unprecedented, particularly because Shimao is part of the white-list scheme, which secures financial support from commercial banks for property development.
Shimao's troubles intensified in November 2023 when its ambitious Shenzhen Hong Kong International Centre, set to become China's tallest tower at 668 meters, failed to attract any serious bidders again, at its second auction.
The starting bid of Rmb10 billion ($1.4 billion) for the half-built skyscraper, which represents the majority asset of the site, was less than half of the Rmb23.9 billion that Shimao paid for the land in late 2017.
The auctions followed the Shanghai-based developer’s default on its offshore bonds: it missed interest and principal payments on a $1 billion issue in July 2022.
Despite launching a debt-reconstruction plan for its entire $11.7 billion of offshore debt in March, Shimao faces opposition from bondholders. CCB (Asia)'s petition focuses on Shimao's failure to repay loans of HK$1.58 billion ($201 million). The first court hearing is scheduled for June 26.
Deutsche Bank is understood to be considering taking similar action against Shimao, after deeming the developer's debt-restructuring terms unacceptable. The bank declined to comment on the issue.
"A liquidation petition doesn’t usually aim for actual liquidation, but is often a strategy to pressure repayment," explains a senior investment banker at one state-owned Chinese bank.
He adds that offshore petitions typically recover only 3% to 5% of the losses, since most property assets are onshore.
Shockwaves
The liquidation petition from state-owned CCB sent shockwaves through the market, causing Shimao's Hong Kong-listed shares to immediately plummet to a record low of HK$0.37 ($0.05), down 18.7%. They have continued to sink from there.
Why would a state-owned bank, typically tasked with supporting government initiatives, file a petition that seems to go against the aims of the whitelist scheme?
First, it is important to understand that the scheme is project-based, not developer-based. Local governments are responsible for deciding and submitting their whitelist projects to commercial banks for financial support.
To be selected, projects must meet key criteria: funds are to be used solely for construction and delivery; projects must adhere to closed-loop fund management; and the project itself must provide collateral equivalent to the bank's funding.
Essentially, the scheme focuses on ensuring project delivery, not the survival of developer.
According to state-backed media, by March; 1,979 whitelist projects had received credit totalling Rmb469 billion, while 1,247 projects were granted loans amounting to Rmb155 billion.
Shimao itself announced in February that it had submitted 40 projects across different cities, with 16 of these having made it on to the whitelist.
The deep interconnection of China's real-estate and banking sectors has fuelled widespread pessimism
Secondly, liquidation petitions take years to conclude, and real liquidation takes even longer.
China Evergrande, the world's most-indebted property developer, was first under petition in June 2022, with Hong Kong's High Court finally ordering liquidation in January this year.
However, the court clarified that the winding-up petition only targets the parent company and will not directly impact subsidiaries, especially those operating in mainland China.
Moreover, liquidation petitions, often wielded as a weapon by investors, seldom result in actual liquidation in the real-estate sector due to inefficient loss-recovery.
At least six property developers, including Country Garden and Kaisa Group, have faced such lawsuits in Hong Kong in recent months, with Country Garden officially downplaying the likelihood of a real liquidation.
Finally, CCB (Asia) does not own the debt in question but acts as a representative for its trustee customers, according to one source close to the situation.
"State-owned banks are highly concerned about losing face; they wouldn’t file the petition if they were the buyers, as that would reveal they had purchased the bonds and stepped into a pitfall," the source explains.
Interconnection
The deep interconnection of China's real-estate and banking sectors has fuelled widespread pessimism. As long as the property market remains in distress, banks will be forced to continue their role as a lifeline, transfusing much-needed capital into the ailing sector.
When Shu Gu, chairman of the Agricultural Bank of China showed up in Hong Kong for the annual results media conference in March, he emphasized a key message: ABC has proactively sacrificed profit to maintain its support for the real economy.
However, CCB (Asia)'s petition has sent a strong message that banks are not tied to individual real-estate developers, even though they remain committed to project delivery. With most Chinese residential projects being pre-sold, failure to deliver these projects could result in some big social problems.
