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Hidden Chinese Property Debt Sends Shockwaves Through Bond Market and Sparks Bank Run

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Hidden Chinese Property Debt Sends Shockwaves Through Bond Market and Sparks Bank Run

The Chinese property market is facing a growing crisis as hidden debt entanglements among financial firms come to light, causing concern for investors and triggering a bank run. Recent reports highlight how private equity, especially Ping An Insurance Group of China Ltd’s real estate subsidiary, is becoming a “hot potato” in the Chinese property sector.

Investors are growing nervous about the ability of Ping An Real Estate Co. Ltd to repay its 2 billion RMB ($274 million) bond, which has seen its value fluctuate wildly. Questions arise about the company’s cash reserves, with only enough to cover half of its interest payments over the next 12 months, raising doubts about the parent company’s ability to step in and repay the debt.

Furthermore, concerns about off-balance sheet debt have emerged, with the China Securities Regulatory Commission (CSRC) uncovering a 200 million RMB overdue debt tranche that was concealed in a new bond filing. This revelation sheds light on the use of joint venture partnerships to borrow cash without declaring an increase in leverage, a potentially risky practice.

The situation mirrors the collapse of US subprime mortgage loans, which triggered a financial crisis. As the Chinese property market faces the prospect of major developers such as China Evergrande Group and Country Garden Holdings Company Limited collapsing, investors fear a contagion that could spread to other sectors.

The entanglement of off-balance sheet property loans and beleaguered banks and insurance companies is reminiscent of the unravelling of US subprime, when banks such as Citigroup Inc., Goldman Sachs Co. and Morgan Stanley, as well as insurers such as American International Group Inc, all had to be bailed out by the government as the extent of their interconnected liabilities became known.

As the situation unfolds, banks like Cangzhou Bank are already experiencing a bank run, with customers rushing to withdraw their money due to fears of over-extended loans made to China Evergrande. This mounting crisis raises concerns about the stability of the financial services sector in China and the potential for a broader contagion.

The Chinese property market’s hidden debt problem is a ticking time bomb with far-reaching implications. The turmoil in Ping An Insurance’s real estate unit and the use of off-balance sheet debt in joint venture partnerships pose serious risks that could rock the entire financial system. As investors closely watch the unfolding saga, the future of the Chinese property market hangs in the balance.