China’s Kaisa Case Highlights Chinese Real Estate Bubble Solutions

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By Jacob Maslow

construction site in chinaIt is an open debate whether or not there is a real estate bubble in China. What is true is that there are millions of buildings with no occupants. What is also true is that prices are beginning to go down while more and more units are being built. If this all sounds familiar, it should. This is exactly what happened in the United States during the great housing crash of 2008.

It appears that the lesson of the great financial crash of 2008 hasn’t been lost on Chinese authorities. While Kaisa Group Holdings is a private company, this property developer’s strategy of dealing with its offshore debt should be illustrative of how Chinese banking authorities and the Chinese financial market aim to tackle a potential housing crash. A lot of China’s housing boom is financed by long-term debt.

It is really important to pay attention to how ostensibly private developers are dealing with the softening housing market in China and their debt. One key lesson to take away from Kaisa’s approach is that it is not offering a haircut to offshore debtors. This is great news. A haircut essentially means discount on the principal owed. We are not even talking about the interest. We are talking about discounting the principal owed.

Kaisa’s move should reassure foreign creditors that Chinese real estate players will not turn their backs on their obligations. What Kaisa is looking for, however, is a restructuring of the debt. This means extending the timeline and cutting the interest down to size. The principal is preserved. The interest is still preserved although the timeline is stretched. While this should be a cause for concern for many creditors looking for orderly payment of debt, this is still definitely a much better alternative than a principal haircut or default.

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