China’s property insecurity continues, fueling market anxiety

Listings of apartments for sale displayed at a real estate office in Shanghai, China, Monday, August 30, 2021.

Qilai Shen | Bloomberg | Getty Images

BEIJING – Wild fluctuations in Chinese real estate stocks and bonds keep investors on edge – these headlines could cause problems in the sector to spread to the rest of the economy, says S&P Global Ratings.

While the dive in Evergrande’s shares has slowed, volatility in other Chinese real estate companies continued this month.

On Thursday, Kaisa shares rose briefly by 20% after news that they could avert default. On the same day, a Shanghai-traded bond from developer Shimao fell 30%, reminiscent of a sharp sell-off of the company’s bonds earlier this month.

“Headlines can hit sentiment and create contagion,” said Charles Chang, senior director and head of Greater China for business reviews at S&P Global Ratings, in a report earlier this month.

The risk that Chang presented is that news reports of defaults, or even the potential for defaults, could scare Chinese home buyers away. And that a drying up of demand would put developers out of the market along with the construction companies and other suppliers working with them.

Consensus among economists is that the downturn in real estate is contained, as it is driven by a top-down government decision to limit reliance on debt in the real estate industry. The People’s Bank of China summed up this view in mid-October, calling Evergrande a unique case and reaffirming the overall health of the real estate sector.

But investors have become more and more concerned about how Beijing’s downturn would actually play out. News of the default of a much smaller developer, Fantasia, and growing funding problems among other developers, began to exacerbate a sharp sale.

I’m not entirely sure that regulators and authorities understand the damage this is doing to the offshore market, because many investors will not return.

Jennifer James

Janus Henderson Investors

The Markit iBoxx index of Chinese high-yield real estate bonds clings to monthly gains after some volatile weeks – including a fall of almost 18% in October and a fall of almost 11% in September.

“It’s a really trying time for investors right now, probably more for bond investors than stock investors, because what we’re really seeing is a real-time political transition,” said Jennifer James, portfolio manager and leading emerging market analyst at Janus. Henderson Investors, told CNBC earlier this month.

Even worse for foreign institutional investors, typically more comfortable with detailed messages from companies and policy makers, China’s system tends to rely more on broad government statements and cautious business information.

This lack of clarity has been a long-standing problem with investing in China-related assets.

Investors left in the dark

Instead of companies making announcements during the worst sale earlier in the month, James said she often learned about how they fared through news reports, days or weeks later. These include meetings with the government.

“I’m not entirely sure that regulators and authorities understand the damage this is doing to the offshore market, because many investors will not return,” James said.

The lack of clarity exacerbated the situation, the research institute Rhodium Group pointed out in a note on Tuesday.

“The most important political signal was a non-signal: the absence of a clear decision on what concrete actions to take to resolve Evergrande’s situation and curb real estate infection,” said analysts at Rhodium Group.

“Officials underestimated the severity of infection and systemic concern, made confusing promises to prevent a full inventory, and ultimately claimed that the original political disciplines that triggered property stress had been misinterpreted,” it said.

“If the government intended to build confidence in the direction of financial reforms, the result has been the exact opposite,” they said.

For investors left in the dark, the ensuing anxiety meant they would rather sell than stay invested.

“The problem is, when you have a market impact that has gone far beyond what anyone would reasonably have expected in early October, then you have to start asking, ‘What is the macro impact?'” Jim Veneau, head of bonds, Asia at AXA Investment Managers, told CNBC earlier this month.

The potential macroeconomic consequences can be significant.

Real estate and related industries account for about a quarter of China’s economy.

Property accounts for the majority of household wealth.

According to S&P, residential land accounts for 85% of local government revenue from land sales.

Selling land to developers provides critical revenue to local authorities as they cannot generate enough revenue from taxes to pay for all their expenses, according to the Rhodium Group.

But builders will not buy as much land now as negative investor sentiment makes it harder for real estate companies to get financing. The business cycle of Chinese real estate companies is heavily dependent on adequate financing to ensure that consumers get the apartments they have paid for before they are completed.

Developers are struggling to get funding

Unlike other industries, Chinese developers relied far more on the offshore bond market, giving them access to foreign investors.

But that funding channel began to dry up as negative sentiment surrounding real estate companies rose amid concerns that Evergrande – who owes more than $ 300 billion – might default.

The number of Chinese high-yield bond trades fell in October to just two trades worth a total of $ 352 million, according to Dealogic. That’s a drop from $ 1.62 billion for 9 deals in September, and a maximum of 29 trades worth $ 8.5 billion in January, the data showed.

These tight financing conditions reflect a relatively challenging environment for property developers to also get capital on the mainland.

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“A lot of easy things can happen through messaging,” James said. “Someone can come out and say, ‘This is a very important part of our economy, and we will always be supportive.’

But one of the recent announcements from the People’s Bank of China was that the real estate market in general remains healthy.

As a result, Ting Lu, China’s chief economist at Nomura, does not expect a change in property boundaries until at least spring.

– CNBC’s Weizhen Tan contributed to this report.

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