China’s real estate uncertainties persist, fueling market anxiety

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

Qilai Shen | Bloomberg | Getty Images

BEIJING – Wild swings in Chinese real estate stocks and bonds keep investors on their toes – these headlines could cause the sector’s troubles to affect the rest of the economy, S&P Global Ratings says.

While Evergrande stock’s plunge has subsided, volatility has continued in other Chinese real estate companies this month.

On Thursday, Kaisa stock rose 20% briefly after it was revealed it could stave off a default. On the same day, a Shanghai-traded bond from developer Shimao plunged 30%, reminiscent of a sharp sell-off in the company’s bonds earlier this month.

“Headlines can hit the mood and spark contagion,” said Charles Chang, senior director and country leader for Greater China for corporate ratings at S&P Global Ratings, in a report earlier this month.

The risk Chang pointed out is that news of default, or even the possibility of default, could deter Chinese homebuyers. And this drying up of demand would drive the construction companies out of business along with the construction companies and other suppliers who work with them.

The consensus among economists is that the housing slump will be contained as it is being driven by a top-down government decision to limit reliance on real estate debt. The People’s Bank of China recapitulated this view in mid-October, naming Evergrande a unique case and confirming the general health of the real estate sector.

But investors are increasingly concerned about how Beijing’s raid would actually end. News of the default of a much smaller developer, Fantasia, and growing funding problems among other developers began to worsen a sharp sell-off.

I’m not entirely sure regulators and authorities understand the damage this is doing to the offshore market as many investors are not going to return.

Jennifer James

Janus Henderson investors

The Markit iBoxx index for Chinese high-yield real estate bonds holds on to monthly gains after a few weeks of volatile, including a decline of nearly 18% in October and a decline of almost 11% in September.

“It’s a really tough time for investors right now, probably more bond than equity investors, because what we are really seeing is political change that is happening in real time,” said Jennifer James, portfolio manager and leading emerging markets analyst for Janus Henderson Investors , CNBC announced earlier this month.

Worse still for overseas institutional investors, who are usually more comfortable with detailed messages from corporations and policymakers, China’s system tends to rely more on broad-based government statements and cautious corporate disclosures.

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

Investors left in the dark

Instead of making announcements to companies during the worst sell-off earlier this month, James said she often learned how they were doing days or weeks later through news reports. This includes meetings with the government.

“I’m not entirely sure regulators and regulators understand the damage this is doing to the offshore market as many investors will not be returning,” said James.

The uncertainty exacerbated the situation, as the research institute Rhodium Group pointed out in a statement on Tuesday.

“The main political signal was a no-signal: the lack of a clear decision on what specific action needs to be taken to resolve Evergrande’s situation and curb the contagion in the real estate sector,” said analysts at Rhodium Group.

“Officials underestimated the severity of the contagion and systemic concern, made confusing promises to prevent a full settlement, and eventually claimed that the initial political disciplines that sparked the real estate stress were misinterpreted,” it said.

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

For investors left in the dark, the resulting fear meant that they would rather sell than stay invested.

“The problem is that if the market impact is well beyond what you would have reasonably expected in early October, you have to ask yourself, ‘What is the macro impact?'” Jim Veneau, Head of Fixed Income, Asia, AXA Investment Managers, announced CNBC earlier this month.

The potential macroeconomic consequences can be significant.

Real estate and related industries make up about a quarter of the Chinese economy.

The majority of household wealth is in real estate.

S&P says residential land accounts for 85% of local government revenues from land sales.

According to Rhodium Group, land sales to property developers provide vital revenue for local governments as they cannot generate enough tax revenue to pay all of their expenses.

But developers won’t want to buy as much land now as negative investor sentiment is making real estate companies difficult to finance. The business cycle for Chinese real estate companies depends heavily on adequate funding to ensure consumers get the homes they paid for before completion.

Developers are fighting for funding

Unlike other industries, Chinese developers relied much more heavily on the offshore bond market, which gave them access to foreign investors.

But that funding channel began to dry up as negative sentiment built around real estate companies on concerns that Evergrande – which owes more than $ 300 billion – could default.

According to Dealogic, the number of Chinese real estate high-yield bond deals fell to just two deals in October, valued at $ 352 million. That’s a drop of $ 1.62 billion for 9 deals in September and a high of 29 deals worth $ 8.5 billion in January, the data showed.

These tight financing conditions reflect a relatively difficult environment for property developers to obtain capital on the mainland as well.

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

However, one of the most recent reports from the People’s Bank of China was that the property market remains healthy overall.

Therefore, Ting Lu, chief economist for China at Nomura, does not expect a change in real estate restrictions until the spring.

– CNBC’s Weizhen Tan contributed to this report.