How China’s Property Crisis Blew Up Bets That Couldn’t Lose

One of China’s largest investment firms, Citic Trust, had a clear pitch to investors when it was aiming to raise $1.7 billion to fund property development in 2020: There is no safer Chinese investment than real estate.

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

Three years later, investors who put their money in the Citic fund have recouped only a small fraction of their investment. Three of the fund’s construction projects are on hold or significantly delayed because of financing problems or poor sales. Sunac has defaulted and is trying to restructure its debt.

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

The nexus of government, financial institutions and companies supercharged China’s property sector for years, clearing the way for the nonstop building that propelled real estate to become the biggest sector of the economy. But the ties that once juiced growth are now deepening the downturn as problems spread across the economy.

This month, China South City Holdings, a state-backed developer, warned that it did not have the funds to pay interest on its overseas debt, and investors agreed to restructure the debt to stave off a possible default. And Hywin Wealth Management, a major real estate investor, said it had to delay some redemption payments, citing “the economic downturn.”

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

For its part, China’s central government pledged this month to “actively and prudently resolve real estate risks” and help firms to meet their “reasonable financing needs.” The problems have gotten big enough that it seemed Beijing, which has yet to offer lifelines to troubled developers, was finally signaling its willingness to step in after more than 50 companies have defaulted on loans since 2021.

“Three years ago, nobody would have dreamed of this amount of defaulting,” said Andrew Collier, managing director at Orient Capital, an economic research firm in Hong Kong. “It is pretty staggering.”

Investors were confident in real estate.

Trust firms like Citic are arms of China’s so-called shadow banking system that sell investment products to companies and wealthy individuals. They face few requirements to publicly disclose information about their operations and as a group manage $3 trillion in assets.

Property developers had relied on trust firms to extend loans and invest in businesses that regulators considered too risky for traditional banks. The trusts turned the loans into investment products they then sold to Chinese companies and wealthy individuals, promising lucrative returns.

The market was booming when Citic Trust established the Junkun Equity Fund, raising $1.7 billion for Sunac to use. With real estate prices soaring, when Sunac’s projects moved forward and the properties were sold, investors would get their money back as well as a portion of the profit after three years. The payoff for the Junkun fund, one of hundreds that Citic Trust offered, was potentially higher than an investment with a fixed return, but there was also more risk.

Even though Citic did not guarantee how much money investors would make, it included in marketing materials a chart of “similar projects” from Sunac that had delivered double-digit returns.

At least that’s the way it was supposed to work.

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

“At that time, I was fairly confident in real estate,” said Ms. Zhang, 38, who lives in the southern Chinese city Shenzhen. “Housing prices were all rising.”

But from the outset, the 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 was grappling with Covid. Pandemic restrictions caused construction delays and hurt property sales.

Citic Trust, in a statement, said it “has firmly safeguarded the legitimate rights and interests of its clients” and made “some progress” in minimizing risks stemming from the real estate market. It declined to comment on the Junkun fund.

Sunac did not respond to requests for comment.

Government grew concerned about the market.

Also around the time the fund was started, policymakers in Beijing, worried about a housing bubble and reckless speculation, put in place new rules aimed at curbing excessive borrowing by developers. This created cash problems for many developers. In May 2022, Sunac said it missed a bond repayment and warned that it would not be able to make other debt payments.

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

A Citic Trust official said in a November investor briefing that it did so because its research showed that demand would remain poor for many months and Covid lockdowns made the situation unpredictable, according to a recording of the briefing reviewed by The New York Times. Citic said it feared that sales could not keep pace with construction costs.

For a mixed residential and commercial property project in Shaoxing, a city near the coast famous for its locally produced yellow wine, preliminary sales have been sluggish.

Citic considered selling the project in January, but it struggled to find a buyer because developers were scaling back, a company official said at the briefing. Then after sales slowed in July, Citic said it decided to try to find a company to invest in the project to help ease the financial burden.

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

When the Citic investment matured in October, Ms. Zhang said, she received about $80,000 in payouts although it wasn’t clear to her if that was interest on her investment or part of her principal of $420,000.

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

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

“The money has not arrived, so everyone will definitely be worried and angry — this is normal,” she said. “But don’t get too angry.”