• Something significant happened in China on April 20th – Kaisa, a Shenzen-based property developer, finally buckled under $10.5 billion of debt. While Kaisa investors are undoubtedly angry, this is not the whole story. With an estimated $78.8 billion funnelled into the Chinese property market there are serious concerns defaults will now spread – with direct consequences for the Australian economy.

Down with Kaisa

• The development of the Kaisa story surprisingly started with a Chinese government initiative to temper the expansion of a domestic property bubble. In short, the Chinese authorities prohibited property developers from using borrowed money from the PRC banks to purchase land. However this did not stop developers and had the unintended consequence of pushing them to search for finance offshore. With international investors eager to find high yields following the GFC, investment proved easy to come by.
• Importantly Kaisa was not alone in finding this loophole, but they were the first; issuing $650 million of five year bonds in April of 2010, offering a solid 13.5% return. Compare this with the US real estate yields at the time (6.3%), and there is little wonder why investment became a flood.

Not Loose Change

• As the graph below shows, over the five year period from 2010 to 2014 Chinese property developers’ issuance of international bonds increased substantially. In 2010 a mere nine real estate companies issued US$4 in offshore bonds but by 2014 that number had almost quadrupled. Now the total bonds issued has reached an extraordinary US$78.8 billion – equivalent in value to 13 times the entire Australian residential property market.

This update does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek professional advice before acting or relying on any of the content.