China’s real estate insecurity is persistent and fuels market insecurity

A list of apartments for sale on display at a real estate office in Shanghai, China on Monday, August 30, 2021.

Qilai Shen | Bloomberg | Getty Images

Beijing — China’s real estate stock and bond volatility is hunting down investors — these news headlines could spread sector issues to other economies, S & P Global Ratings said.

While Evergrande’s share price plunge has eased, the volatility of other Chinese real estate companies continues this month.

On Thursday, Kaisa shares temporarily surged 20% after news that they could stave off defaults. Bonds traded in Shanghai by developer Shimao plunged 30% on the same day, reminiscent of the company’s bond plunge earlier this month.

“Headlines can hurt emotions and promote transmission,” Charles Chan, senior director of S & P Global Ratings and Greater China Country Lead, said in a report earlier this month.

The risk presented by Mr. Chan is that news coverage of defaults, or even the possibility of defaults, can scare Chinese homebuyers. And that depletion of demand, along with construction companies and other suppliers working with them, will bring developers out of business.

The consensus among economists is that the downturn in real estate has been curbed, driven by a top-down government decision to limit the real estate industry’s dependence on debt. The People’s Bank of China summarized this view in mid-October, calling Evergrande a unique case and confirming the overall health of the real estate sector.

But investors are becoming more and more worried about how Beijing’s crackdown will actually take place. The default news of Fantasia, a much smaller developer, and growing funding issues among other developers have begun to exacerbate the sharp sellout.

It’s unclear if regulators and authorities understand the damage this can do to the offshore market, as many investors aren’t coming back.

Jennifer James

Janus Henderson Investors

The Markiti Boxx index for China’s high-yield real estate bonds has been sticking to a volatile monthly rise after a few weeks, with a drop of nearly 18% in October and a drop of nearly 11% in September.

Jennifer James, Portfolio Manager and Emerging Markets Analyst at Janus Henderson, said: Investors told CNBC earlier this month.

To make matters worse for foreign institutional investors, the Chinese system tends to rely on broad government statements and cautious corporate disclosures, as they are usually accustomed to detailed messages from businesses and policy makers.

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

Investors left in the dark

James said he was familiar with how they behave through news reports days or weeks later, rather than companies announcing during the worst sold-out earlier this month. These include meetings with the government.

“It’s unclear if regulators and authorities understand the damage this will do to the offshore market, as many investors aren’t coming back,” James said.

The lack of clarity exacerbated the situation, the research institute’s Rhodium Group said in a note on Tuesday.

“The most important policy signal wasn’t the signal,” said a Rhodium Group analyst. “It’s clear what concrete actions should be taken to resolve the Evergrande situation and stop the infection of the real estate sector. There was no decision. “

“Official officials underestimated the seriousness of transmission and systemic concerns, made misleading pledges to prevent complete calculations, and ultimately misinterpreted the first policy discipline that caused property stress. Claimed to have been done. ”

“If the government intended to build confidence in the direction of financial reform, the result was the opposite,” they said.

For investors left in the dark, subsequent anxiety meant selling rather than continuing to invest.

“The problem is that at the beginning of October, if there is a market impact that far exceeds what everyone reasonably expected, we have to start asking,’What is the macro impact?'” Bonds Division. Asia, head of AXA Investment Managers Jim Benault, told CNBC earlier this month.

The potential macroeconomic impact can be significant.

The related real estate and industry make up about a quarter of the Chinese economy.

Property accounts for the majority of household wealth.

Residential land accounts for 85% of municipal land sales revenue, according to S & P.

According to the Rhodium Group, selling land to developers provides significant income to local governments as they cannot generate enough income from taxes to pay all costs.

But developers don’t want to buy that much land now, as the negative sentiment of investors makes it difficult for real estate companies to raise money. The business cycle of Chinese real estate companies relies heavily on sufficient funding to ensure that consumers get their pre-completion apartments.

Developers are having a hard time raising money

In contrast to other industries, Chinese developers were much more dependent on the offshore bond market, which provides access to foreign investors.

However, the funding channel has begun to run out as negative sentiment towards the real estate company has risen against the backdrop of concerns that Evergrande, which has a debt of more than $ 300 billion, may default.

According to Dealogic, China’s real estate high-yield bond transactions plummeted to two in October, for a total of $ 352 million. This is a decrease from $ 1.62 billion in nine transactions in September, the highest of 29 transactions, which is equivalent to $ 8.5 billion in January.

These stringent funding conditions reflect the relatively difficult environment for real estate developers to raise capital on the mainland as well.

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“Many simple things can happen through messaging,” James said. “Someone can come out and say: this is a very important part of our economy and we always support.”

However, one of the latest messages from the People’s Bank of China was that the real estate market remains healthy overall.

As a result, Nomura’s Chief China Economist, Ting Lu, does not expect real estate regulatory changes to take place at least until spring.

— CNBC’s Weizhen Tan contributed to this report.

China’s real estate insecurity is persistent and fuels market insecurity

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