China’s spreading property debt crisis pushes Xi to ease
(January 18): Financial contagion is making a comeback in China’s property sector, putting renewed pressure on Xi Jinping’s government to do more to isolate the country’s most powerful developers.
Monday was the worst day on record for dollar bonds at Country Garden Holdings Co, China’s biggest developer by sales. Some of its ratings fell to 62 cents, while its shares fell to a nearly five-year low. The sell-off also spread to stronger issuers like Longfor Group Holdings Ltd and China Vanke Co for the first time, as well as China’s bad debt managers amid concerns over their exposure to the real estate market. , traders said.
As the panic appeared to wane on Tuesday, with developer bonds and stocks paring some of the previous day’s losses, analysts expect the situation to worsen unless Beijing acts to improve access to the financing of the real estate sector. Citigroup Inc economists say authorities may need to ease restrictions on using presale proceeds for financing, as well as allay concerns about a planned national property tax by rolling out a softer levy “as soon as as possible”.
Banks are also expected to cut their benchmark rate for mortgages on Thursday.
“The spread of the crisis from weaker names to higher quality names reflects how long these companies can survive without political support,” said Anthony Leung, head of fixed income at Metropoly Capital HK. “The best credits can last the longest, but as time passes and the support doesn’t come, even the strongest can’t survive.”
The growing risk of financial contagion underscores the challenge Xi faces as he restructures the housing market, especially at a time when the country’s Omicron outbreaks are clouding the outlook for the economy. Xi seeks to reduce the threat of a real estate crash to the financial system, as well as to narrow the gap between the country’s rich and poor.
“We see an urgency for the government to stabilize the property sector,” Citigroup Inc analysts Xiangrong Yu and Xiaowen Jin wrote in a Monday note. “In particular, there may be a need to provide credit enhancement and ease regulations on pre-sale funds for private developers.”
Behind the scenes, the authorities seem to be strengthening the position of large companies or state-backed companies. In Guangdong – home to failing China Evergrande Group and Kaisa Group Holdings Ltd – local officials recently facilitated meetings between struggling developers and state-owned companies, local media reported. Loans from large developers used to finance mergers and acquisitions will no longer be counted in measures that limit debt. In December, a handful of the strongest private sector builders tapped the onshore interbank credit market for funds.
Shanghai Pudong Development Bank Co’s plan to sell 30 billion yuan ($4.7 billion) of three-year bonds to fund loans for real estate acquisitions is the first of its kind from a financial institution, said the China Securities Journal. Bookbuilding for the bonds will begin on Friday, according to the report.
Despite these efforts, the fact that the ratings of higher quality developers may drop to distressed levels marks a turning point for investors. Many had assumed that companies with stronger finances would have no problem accessing the offshore bond markets. That assumption was called into question when Country Garden struggled to sell a convertible note last week due to weak demand, according to IFR.
“This is arguably the darkest chapter yet for Chinese offshore dollar bonds,” said Dhiraj Bajaj, head of Asia credit at Lombard Odier. “Policy opacity has reached a tipping point for investors, and investors are looking for an easing of overly aggressive policies.”
Measures such as encouraging state banks to lend directly to struggling developers could help ease tensions in offshore markets. China has so far refrained from using such tools, especially as its much larger onshore credit market remains resilient.
Most funding channels remain virtually paralyzed for stressed Chinese developers. Yields on Chinese speculative dollar debt have jumped more than 20% this month, making offshore markets prohibitively expensive. Weaker companies would struggle to sell debt to risk-averse onshore investors. When Sunac China Holdings Ltd appealed to equity investors instead last week, its shares fell a record 23% in Hong Kong.
Generating cash becomes more difficult. Late last year, a number of major Chinese cities and some smaller municipalities tightened scrutiny on the use of proceeds from pre-sold properties. Home sales and prices are down, according to official data. Several of China’s largest banks have become more selective in financing real estate projects through local government financing vehicles.
If the authorities are worried about the contagion, they do not show it. On Monday, the head of China’s statistics bureau downplayed housing market risks, saying he expects stable and “healthy” growth in real estate investment this year. Central bank governor Yi Gang has repeatedly said that China will control the risks posed to the economy by the liquidity crunch at developers like China Evergrande Group.
Investors will be on alert for any comments on the property sector from the People’s Bank of China, which is due to give a briefing on credit data at 3 p.m. in Beijing.
Chinese bad debt managers are also under pressure. Concerns over China Huarong Asset Management Co’s real estate exposure have triggered declines in their dollar bonds in recent days, credit traders said. The Huarong dollar note due 2030 is expected to fall for a ninth straight day after falling 1.2 cents to 89.8 cents on the dollar on Monday, Bloomberg-compiled prices show.
At least seven developers have defaulted on dollar bonds since October. That includes Evergrande, whose crisis has trapped lender China Minsheng Banking Corp, the world’s worst-performing banking stock. Guangzhou R&F Properties Co was downgraded to restricted default by Fitch Ratings last week due to what the ratings firm called a distressed debt swap.
Chinese real estate companies must repay or refinance some US$99 billion in local and offshore bonds this year. A little less than half of this sum corresponds to the outstanding debt in dollars, Bloomberg-compiled data show.