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China debt crunch

Developer Sunac seeks support from Chinese city to stem slowdown

Stock rebounds after company says 'draft memo' erroneously leaked

Sunac insists that its operations and sales in Shaoxing are "normal" and "fine."   © Reuters

HONG KONG -- Property developer Sunac China Holdings has asked for "special policy support" from a city government to stem slowing sales, underscoring challenges faced by once-highflying companies in the world's second largest economy.

Sunac asked Shaoxing, a city in eastern Zhejiang Province famous for its yellow rice wine, for support as rules introduced in June had curbed demand and hurt local projects, according to a letter written by one of its units and seen by Nikkei Asia. The company did not specify what type of support it needed in the letter, which went viral in Chinese social media.

Sunac said on Tuesday, however, that the document was a "draft memo" sent in "error" last Friday to a local social media group about real estate.

According to the company's Chinese statement, the memo was to be used as notes ahead of a safety inspection by local officials of a development project called Huangjiu Xiaozhen. The company's top local executive planned to take advantage of the visit to lobby the officials, as the project is a joint venture involving both Sunac and the city government.

"Our company has never in the past and never will have any need or intention to submit a report like this to the government," Sunac said, apologizing for "misleading" the public about the matter.

Yet the memo's tone was stark.

"We earnestly request the government to provide us with special policy support, as it is difficult for daily operations in Shaoxing to move forward and the situation is deteriorating daily," it said.

Cash flows with the project have "encountered very large hindrance and difficulties," the memo said, adding that with support from Sunac diminishing, the heavy operational costs had forced Huangjiu Xiaozhen into "an impasse." It estimated the company had 11.7 billion yuan of cash tied up with the project and seven others around Shaoxing.

Property, which by some economist estimates contributes to as much as a third of China's gross domestic product, is facing a regulatory crackdown aimed at reducing risk and leverage in the financial system. Data this month showed home sales by value dropped 20% in August, and new housing starts in China fell 1.7% in the Jan.-Aug. period compared to the year before.

The crackdown included curbs on real estate company borrowing and has led the world's most indebted developer China Evergrande Group to the precipice of default. The company missed an offshore bond interest payment last week and is has not paid retail debt holders, banks, suppliers and employees on time, leading to suspension of work at more than half its 800 developments across the country.

Sunac, which is on a much stronger footing than Evergrande, said it had invested 7.7 billion yuan ($1.2 billion) into a multiuse project that spans tourism, business and residences, in Shaoxing. However, it sold only one to two units a week since it opened the project for sales in August. Since then it has recovered just over 200 million yuan in sales, according to the letter.

The news "reflects the current pressure on developers in terms of operations and liquidity management," Nomura credit analysts wrote in a note.

"However, we do not think it is Sunac alone who is facing difficulties on falling presales and slow cash collections. We actually believe the whole sector should be facing similar challenges and presales for September will decline materially due to a hold-off from purchasers on the Evergrande noise," the analysts said.

Sunac told Nomura that Shaoxing only contributed 2.4% of its presales in the first half and accounted for 2% of its land bank.

The analysts added that with Sunac's "improving capital structure," it was not a "near-term default candidate."

Still, shares in Sunac dropped 9.4% on Monday following a 6.9% decline in the previous session. Some of its offshore bonds were reduced to as low as 85 cents on the dollar on Friday from over 90 cents previously.

A declaration by the People's Bank of China that it would "safeguard healthy development of the real estate market" in a quarterly update on Monday evening helped lift shares of Sunac and other developers on Tuesday.

Sunac shares shot up 17% during the morning session in Hong Kong, while the overall Hang Seng Properties index gained 3.4%.

In the Shaoxing memo, Sunac's unit said a series of tightening measures introduced by the city to control rising house prices since June 3 had severely affected sentiment, with housing resales slumping 62% year-on-year during the three months to August and new home sales also plunging.

The temperature of the overall market is near freezing point," the memo said.

However, in the Tuesday statement, Sunac described its Shaoxing operations as "normal" and sales as "fine" while vowing to "further increase investment dynamics" in the city.

Overall, Sunac's contracted sales rose 33% over the first eight months of 2021 to 415.1 billion yuan.

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