How China’s real estate crisis exploded bets that couldn’t lose

One of China’s largest investment firms, Citic Trust, had a clear message to investors when it set a target of raising $1.7 billion to fund real estate development in 2020: there is no safer Chinese investment than real estate.

The trust, the investment arm of state-owned financial conglomerate Citic, called housing “China’s economic ballast” and “an indispensable value investment.” The money raised would be spent on four projects by Sunac China Holdings, a major developer.

Three years later, investors who put their money into the Citic fund have only recouped a small portion of their investment. Three of the fund’s construction projects are at a standstill or have been significantly delayed due to financing problems or poor sales. Sunac has defaulted and is trying to restructure its debts.

The unraveling of the Citic fund offers insight into the broader problems facing China’s ailing real estate sector. What started as a housing crisis has escalated into a full-blown crisis. The budgets of local governments, which relied on real estate income, have been destabilized. The shock to the country’s financial system has drained China’s capital markets.

Cooperation between the government, financial institutions and companies has boosted China’s real estate sector for years, paving the way for the non-stop construction that made real estate the largest sector of the economy. But the ties that once undermined growth are now deepening the decline as problems spread across the economy.

This month, China South City Holdings, a state-backed developer, warned that it does not have the resources to pay interest on its foreign debt, and investors agreed to restructure the debt to avoid possible bankruptcy. And Hywin Wealth Management, a major real estate investor, said it had to postpone some principal payments, citing ‘the economic downturn’.

Confidence in the investment sector was already shaky. In November, a financial giant that managed $140 billion in assets, Zhongzhi Enterprise Group, told investors it was “severely insolvent.” Zhongzhi’s asset management unit began missing payments to investors in July and said it had a financial shortfall of $36 billion.

For its part, China’s central government pledged this month to “actively and prudently resolve real estate risks” and help companies meet their “reasonable financing needs.” The problems have become so bad that it appeared Beijing, which has yet to offer lifelines to struggling developers, was finally prepared to intervene after more than 50 companies defaulted on their loans since 2021.

“Three years ago, no one could have dreamed of this number of bankruptcies,” said Andrew Collier, director of Orient Capital, an economic research firm in Hong Kong. “It’s quite staggering.”

Investors had confidence in real estate.

Trust firms like Citic are branches of China’s so-called shadow banking system, which sell investment products to corporations and wealthy individuals. They face few requirements to disclose information about their activities and manage them as a group $3 trillion of assets.

Real estate developers relied on trust companies to make loans and invest in companies that regulators deemed too risky for traditional banks. The trusts turned the loans into investment products that they then sold to Chinese companies and wealthy individuals, promising lucrative returns.

The market boomed when Citic Trust launched the Junkun Equity Fund and raised $1.7 billion for Sunac to tap. With property prices soaring and Sunac’s projects progressing and properties being sold, investors will get their money back and a share of the profits after three years. The payout for the Junkun fund, one of hundreds that Citic Trust offered, was potentially higher than a fixed-return investment, but there was also more risk.

Although Citic did not guarantee how much money investors would make, it included in marketing materials a list of Sunac’s “similar projects” that had delivered double-digit returns.

At least that’s how it should work.

Celina Zhang said that she invested about $420,000, a significant portion of her savings, into this fund in 2020 because Citic Trust was a reliable, big brand. A Citic investment manager all but assured her she would get her principal back and an annual return of more than 7.5 percent, Ms. Zhang said.

“At that time, I was quite confident in real estate,” said Ms. Zhang, 38, who lives in the southern Chinese city of Shenzhen. “Housing prices all went up.”

But from the start, developments faced challenges. The projects were a combination of residential and commercial properties in three southern cities – Chengdu, Guiyang and Shaoxing – and one in Xi’an in central China. And like the rest of the world, China struggled with Covid. Pandemic restrictions caused construction delays and negatively impacted real estate sales.

Citic Trust said in a statement that it has “robustly protected the legitimate rights and interests of its customers” and has made “some progress” in minimizing risks arising from the real estate market. It declined to comment on the Junkun fund.

Sunac did not respond to requests for comment.

The government was concerned about the market.

Also around the time the fund was established, policymakers in Beijing, worried about a housing bubble and reckless speculation, introduced new rules to curb excessive borrowing by developers. This caused money problems for many developers. In May 2022, Sunac said it had missed a repayment of the bond and warned it would not be able to make other debt payments.

The impact on Citic investments was drastic. Citic Trust was forced to suspend construction of the Chengdu project last year.

A Citic Trust official said in a November investor briefing that this happened because research showed demand would remain weak for months and that Covid lockdowns were making the situation unpredictable, according to a recording of the briefing reviewed by The New York Times . Citic said it feared sales would not keep pace with construction costs.

Preliminary sales have been slow for a mixed residential and commercial real estate project in Shaoxing, a coastal city known for its locally produced yellow wine.

Citic considered selling the project in January but struggled to find a buyer as developers scaled back, a company official said at the briefing. After sales slowed in July, Citic decided to try to find a company that would invest in the project to ease the financial burden.

In Guiyang, southwest China, Sunac started construction shortly after acquiring land use rights from the city government in May 2020 for about $245 million. But the project has been dogged by a series of stops and starts, including a month-long suspension in August due to “general financing issues,” according to a management report to investors.

When the Citic investment matured in October, Ms. Zhang said, she had received about $80,000 in payouts, although she was unclear whether that was interest on her investment or part of her $420,000 principal.

In November, Citic Trust held a briefing to calm investors and demanded an explanation for the missed payment in October. At the meeting, a company official said the projects retained some value and expressed hope that the government’s recent policies would help – even if there was currently no “clear tangible impact”.

The Citic official acknowledged that “the whole market is not good right now,” but she asked for patience.

“The money hasn’t arrived yet, so everyone will definitely be worried and angry – this is normal,” she said. “But don’t be too angry.”