Through the end of 2014, listed Chinese property developer Kaisa Holdings was reporting excellent sales numbers, strong cash reserves and high profitability. Now it is being dismembered by ravenous creditors and competitors. The company’s major assets have been acquired by other developers and all of its property sales in its home city of Shenzhen have been frozen by the local government. With the company also defaulting on its external debt, the possibility of collapse is impossible to hide.
As with other developers, Kaisa’s leverage turns out to be far greater than what the company reported publicly. Its survival has not relied on an ability to sell its properties profitably but instead on the invisible and complex structure of Chinese political relationships. This enabled Kaisa to access resources such as cash, land and the suppression of buyer demands to receive purchased properties on time. It was, you might say, “Too Connected to Fail.”
But the danger with such arrangements is that when the implicit political endorsement disappears, all lenders, investors, suppliers and customers perceive the underlying risk with clarity. A celebrated company worth billions of dollars can collapse overnight.
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