Summary

  • China’s property slump has triggered a liquidity crisis at Huafa Group, roiling the bond market.
  • Concerns over Huafa Group drove bond ETFs to post one-day outflows of 11.6 billion yuan, or about $1.61 billion, with selling pressure spreading to government and bank debt.
  • Focus has sharpened on Huafa Group’s 80 trillion won debt burden and the risk of a credit-rating downgrade, raising concerns over weaker funding conditions for other local state-owned enterprises and regional banks.

Forecast Trend Report by Period

Even Chinese State-Owned Firms Are Missing Debt Payments on Time, Jolting the Bond Market

Property Developer Huafa Faces Liquidity Strain; Bonds Sink Across the Board

Prolonged Real Estate Slump Erodes Profitability

Debt Load Reaches 400 Billion Yuan, Raising Downgrade Risk

$1.61 Billion Exits Bond ETFs in a Day

Selling Pressure Spreads to Government and Bank Debt

Financial strain from China’s property slump is spreading beyond private companies to state-owned enterprises. Huafa Group, the largest state-owned company in Zhuhai, Guangdong province, is facing scrutiny over its heavy debt burden and liquidity problems, prompting investors to dump bond funds and even government debt. Analysts say debt stress from the prolonged housing downturn is emerging as a source of instability in financial markets.

Shockwaves Spread Across the Financial Sector

Caixin reported on Nov. 5 that China’s Lianhe Zhixin kept Huafa Group’s long-term credit rating at AAA the previous day while placing it on negative watch. The move signals a growing risk of a downgrade as debt concerns mount. It came after Huafa Group failed in late October to repay two trust products on time and moved to extend maturing bank loans. Fitch Ratings also maintained Huafa Group’s long-term rating at BBB on Oct. 29 and placed it on negative watch.

Chinese bond exchange-traded funds fell sharply on Oct. 30 after Huafa Group’s liquidity troubles became known. Macquarie said the China Credit Bond ETF Index dropped 0.5% that day, its biggest one-day decline since 2025.

That led to outflows of 11.6 billion yuan, or about $1.61 billion, from bond ETFs in a single day on Oct. 30. Funds sold holdings in advance to meet investor redemption requests. Selling pressure spread from property-related bonds and local state-owned enterprise notes to government debt and bank bonds. China’s 30-year government bond futures fell 0.94% that day.

Founded in 1980, Huafa Group is one of China’s top 10 property developers, with total assets of 722.964 billion yuan, or about $100.4 billion, as of the end of September. The Zhuhai city government owns 93.48% of the company, while Guangdong provincial finance authorities and others hold the remaining 6.52%. Property development is its core business, though it has expanded into urban operations, finance and high-tech industries.

The problem is that the prolonged real estate downturn has rapidly eroded profitability. Revenue in the first nine months of this year fell 21.31% from a year earlier to 102.693 billion yuan. Pretax loss reached 7.724 billion yuan. Its debt-to-equity ratio stood at 75.36%, and short-term debt maturing within a year totaled 181 billion yuan, or about $25.1 billion. Inventory and investment property accounted for more than 45% of total assets, making it difficult to raise cash through asset sales.

Credit Stress Driven by Weaker Local Finances

China’s property-driven credit crisis had largely centered on private developers such as Evergrande Group and Country Garden. This time, the shock has been greater because a key local government-owned enterprise has run into liquidity trouble. That means even state firms once viewed as relatively safe because of expectations of government support are showing signs of strain.

The pressure reflects worsening finances in Zhuhai itself. The city’s land-sale revenue plunged 94% to 3.3 billion yuan last year from 56.3 billion yuan in 2020. Chinese local governments long relied on land sales for revenue, while affiliated state-owned enterprises supported regional economies through property development and infrastructure investment. But the property slump cut land-sale income, weakening both local government finances and the profitability of affiliated state firms.

Chinese authorities have stepped in to contain broader financial-market stress. Zhuhai has mobilized more than 40 billion yuan, or about $5.55 billion, to help Huafa Group respond to its liquidity crisis through asset restructuring among affiliates and asset purchases. It plans to line up about 70 billion yuan more in resources. Rather than inject cash directly, the city intends to rely on asset purchases among state-owned firms and loan extensions from financial institutions. Since the start of November, market stress has eased somewhat, with credit-bond yields and credit spreads falling.

Still, experts say the liquidity strain has not been fully resolved. China Zheshang Bank said a default on Huafa Group’s corporate bonds could worsen funding conditions for other local state-owned enterprises and weaken asset quality at regional banks. Concerns persist that the crisis could re-emerge at Huafa Group if China’s property market recovery is delayed.

Kim Eun-jung, Beijing correspondent, Korea Economic Daily, [email protected]

Korea Economic Daily