The Unfolding Of Defaults In China’s State-Owned Real Estate Enterprises – Analysis


By Wei Hongxu

The Chinese authorities have implemented a set of financing policies, commonly referred to as the “three arrows” (credit, bonds, and equity), to support the real estate industry. However, the overall market sales in the first half of this year have fallen short of expectations. Particularly since the second quarter, there has been a trend of declining sales following an initial rebound in the first quarter.

According to data from the China Index Academy, in the first half of 2023, the total sales of the top 100 real estate enterprises reached RMB 3,568.23 billion, showing a marginal increase of 0.1% compared to the previous year. However, there was a significant decline of 8.3 percentage points from the previous month, indicating a continued contraction and the occurrence of a second decline. These developments have raised concerns about the country’s economic situation, leading to calls for the introduction of economic stimulus policies to revive the real estate market.

Amidst a contracting market, the real estate industry continues to witness ongoing differentiation, there are worries about a potential second wave of concentrated defaults. In a recent research article by China Merchants Securities, it was noted that real estate companies exhibit differentiation in operations, financing, and long-term development paths. Regarding sales, the report reveals that in 2022, state-owned enterprises experienced a 14% year-on-year decline, mixed-ownership enterprises saw a 26% decrease, and private enterprises faced a significant drop of 43%. In terms of sales concentration among the sample real estate companies, state-owned enterprises rose by 2 percentage points to 16%, while mixed-ownership enterprises remained stable, and private enterprises declined by three percentage points to 10%. Overall, state-owned enterprises demonstrated stronger performance compared to mixed-ownership and private enterprises. China Merchants Securities further suggests that these trends are likely to continue into 2023.

Based on the situation in June, even state-owned real estate enterprises are experiencing differentiation, with some of them facing precarious conditions amid the latest market changes. According to statistics from Zhongtai Securities, in June of this year, sales of real estate companies such as Country Garden, Binjiang, Seazen, CRCC, and Sino-Ocean witnessed a halving in comparison to the same period last year. Additionally, China Merchants, China Resources, China Jinmao, Longfor, and Excellence, among others, recorded a decline in sales of around 30% year-on-year in June. Meanwhile, Vanke, Poly, China Overseas, Greenland, and Huafa, among other real estate companies, experienced sales declines of approximately 20% year-on-year in June. The downward trend in sales is no longer limited to private real estate enterprises alone, as state-owned developers’ sales have also witnessed a significant decline.

This is also giving rise to a new wave of real estate company defaults. Goldman Sachs recently raised the default rate for Chinese high-yield real estate USD bonds from the February forecast of 19% to the current 28%. On June 23, leading real estate company Central China Real Estate in Henan Province announced that it was unable to meet the interest payment obligations on its offshore debt and, under the premise of completing project delivery, temporarily suspended the payment of principal and interest on its offshore bonds, constituting a default. Meanwhile, Sino-Ocean, with China Life Insurance as one of its major state-owned shareholders, recently stated that the two major state-owned shareholders have dispatched working groups and hired consultants to investigate the company, leading to significant fluctuations in the prices of Sino-Ocean’s offshore bonds. According to data from CRIC, in the first six months of this year, Sino-Ocean achieved a total sales revenue of approximately RMB 35.66 billion, representing a year-on-year decrease of about 17.1%. At the same time, the company has been continuously selling assets to ensure normal debt repayment. However, there are concerns that the company may become a new real estate company to default.

In light of the policy adjustments in COVID-19 measures at the end of last year, coupled with the relaxation of real estate policies, ANBOUND researchers had previously assessed the risks in the real estate market in China. We foresaw a significant time lag between policy shifts and market changes, leading to heightened risks in the real estate market. Now, with the lackluster performance of real estate sales, such a prediction is becoming a reality. However, unlike previous defaults that mainly involved private companies, the ongoing differentiation in the real estate market has ensnared some state-owned real estate enterprises, which was inevitable. The default risk faced by Sino-Ocean is not solely attributable to short-term factors but is closely linked to the overall downturn in the real estate market. In 2022, the company recorded a total sales revenue of RMB 100.39 billion, a 35.48% year-on-year decline and ranking 20th among real estate companies. Notably, it also incurred its first annual loss since going public, with a net loss attributable to shareholders amounting to RMB 15.93 billion, a rare occurrence among state-owned real estate enterprises. With the short-term incapacity to reverse the real estate market, Sino-Ocean now faces challenges in sustaining its operations and may be unable to sustain itself before the market’s anticipated recovery.

ANBOUND researchers believe that in the current situation where market conditions are below expectations, the debt risks and market pressures faced by both state-owned and private real estate companies are actually quite similar. The main difference between these two lies in the fact that state-owned enterprises have state assets as shareholders, which allows them to potentially obtain more favorable financing conditions. However, these advantages as a result of state ownership are contingent upon normal market operations. If the market deteriorates too much, even the credit of state-owned enterprises cannot serve as a protective shield. Moreover, the mechanisms of state-owned enterprises may result in lower efficiency when dealing with market fluctuations, as exemplified by the worsening debt issues of the Sino-Ocean company. However, the financial sector continues to place trust in the ability of state-owned enterprises to fulfill their obligations. If state-owned real estate enterprises were to default, the potential consequences could be more severe, primarily due to the significant impact on market sentiment and the potential for a chain reaction that could result in market panic.

To address the possibility of state-owned real estate enterprises entering a second wave of defaults, researchers at ANBOUND believe that it is necessary for the Chinese authorities to take action from two aspects to prevent the systemic risks arising from default risks in the real estate sector. In the long term, under the backdrop of high-quality development, the established strategy of “housing for living, not for speculation” will remain unchanged. The Chinese economy needs to gradually reduce its dependence on the real estate sector, thereby weakening the systemic impact of related default risks on the overall economy. Currently, the real estate market still needs to prioritize stability by ensuring guaranteed delivery of housing and stable housing prices to mitigate the destructive impact of real estate enterprise defaults on the market. Stability is also crucial for maintaining property prices in a region, preventing abrupt declines. Measures such as easing certain city-specific property purchase restrictions to stimulate genuine demand, reducing real estate transaction taxes and fees, and encouraging population inflows can be implemented to uphold the fundamental stability of the real estate market. Problematic and non-compliant real estate enterprises, on the other hand, require an accelerated market clearance process to restart market demand and restore market confidence.

Final analysis conclusion:

In light of the underperformance of the real estate market sales compared to expectations, there is a possibility of a “second dip” in the second quarter, further exacerbating the differentiation within the real estate market and potentially triggering a new round of defaults. The significant volatility observed in the prices of overseas bonds issued by the Sino-Ocean Group indicates that state-owned real estate enterprises are not immune to the downward trend in the real estate market.

However, due to the unique characteristics of these enterprises, the risks and potential impact resulting from their defaults may be more significant. It will be necessary for the relevant authorities to be prepared and take preventive measures to mitigate the irreversible consequences that a collapse of the real estate market could have on the economy.

Wei Hongxu is a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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