China’s real estate uncertainty continues to increase market anxiety

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

Seven Gods | Bloomberg | Getty Images

BEIJING-S&P Global Ratings stated that the dramatic volatility of Chinese real estate stocks and bonds has made investors nervous-these news headlines may cause trouble for the industry and spread to other economic sectors.

Although Evergrande’s stock price plummeted somewhat, the volatility of other Chinese real estate companies continued this month.

On Thursday, Kaisa’s share price rose briefly by 20% after news that it might avoid default. On the same day, developer Shimao’s bonds traded in Shanghai plummeted 30%, reminiscent of the company’s bond sell-off earlier this month.

“Headlines will dampen market sentiment and drive contagion,” Charles Chang, senior director of Standard & Poor’s Global Ratings and head of corporate ratings for Greater China, said in a report earlier this month.

Chang’s risk is that news reports about defaults and even the possibility of default may scare away Chinese home buyers. The exhaustion of demand will bankrupt developers and the construction companies and other suppliers that work with them.

The consensus of economists is that the real estate downturn is controllable because it is 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 affirmed the overall health of the real estate industry.

But investors are increasingly worried about how Beijing’s crackdown will actually unfold. The news that a much smaller developer Fantasia had defaulted, as well as the increasing financing problems of other developers, began to intensify the wave of selling.

I am not sure whether the regulators and authorities understand the damage this has caused to the offshore market, because many investors will not come back.

Jennifer James

Janus Henderson Investor

The Markit iBoxx index of China’s high-yield real estate bonds has maintained monthly gains after several weeks of volatility-including a drop of nearly 18% in October and a drop of nearly 11% in September.

Janus Henderson’s portfolio manager and chief analyst for emerging markets, Jennifer James, said: “For investors, this is indeed a difficult time. For bond investors, it may be more than stock investors. , Because what we are really focusing on is real-time policy changes.” Investors told CNBC earlier this month.

What’s worse for foreign institutional investors is that they are generally more willing to accept detailed information from companies and policymakers, but China’s system tends to rely more on extensive government statements and prudent company information disclosure.

This ambiguity has always been a long-term problem of investing in related assets in China.

Investors in the dark

James said that she did not make an announcement during the worst sell-off earlier this month, but learned about their performance through news reports a few days or weeks later. This includes meetings with the government.

“I’m not sure whether regulators and authorities understand the damage this has caused to the offshore market, because many investors will not come back,” James said.

Research organization Rongding Group pointed out in a report on Tuesday that the lack of clarity exacerbated the situation.

“The most important policy signal is a non-signal: there is no clear decision on what specific actions to take to resolve Evergrande’s situation and prevent the spread of the real estate industry,” said an analyst at Rhodium Group.

“Officials underestimated the seriousness of contagion and systemic concerns, made confusing promises to prevent full liquidation, and eventually claimed that the initial policy discipline that caused real estate pressure was misunderstood,” it said.

“If the government intends to build confidence in the direction of financial reforms, the result is just the opposite,” they said.

For investors who know nothing, the anxiety that follows means that they would rather sell than continue to invest.

“The problem is that when the market impact far exceeds anyone’s reasonable expectations in early October, you have to start asking,’What is the macro impact?'” Jim Veneau, head of fixed income, earlier this month At that time, the head of Asia at AXA Investment Managers told CNBC.

The potential macroeconomic consequences can be huge.

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

Property accounts for the majority of family wealth.

According to Standard & Poor’s data, residential land accounts for 85% of local government revenue from land sales.

Rongding Group stated that the sale of land to developers provides important revenue to local governments because they cannot get enough revenue from taxes to cover all expenses.

But developers do not want to buy so much land now, because negative investor sentiment makes it more difficult for real estate companies to obtain financing. The business cycle of Chinese real estate companies relies heavily on adequate financing to ensure that consumers get the apartments they pay for before completion.

Developers have difficulty financing

Compared with other industries, Chinese developers rely more on the offshore bond market, which gives them access to foreign investors.

However, as concerns about the possible default of Evergrande, which owed more than US$300 billion in debt, intensified, and negative sentiment surrounding real estate companies increased, this financing channel began to dry up.

Dealogic’s data shows that the number of high-yield bond transactions in China’s real estate plummeted to only two in October, with a total value of US$352 million. According to the data, this is down from the high of $1.62 billion in 9 transactions in September and 29 transactions worth $8.5 billion in January.

These tight financing conditions also reflect the relatively challenging environment for real estate developers to obtain funds in the Mainland.

Read more about China from CNBC Pro

“A lot of simple things can happen through messaging,” James said. “Someone can stand up and say: This is a very important part of our economy, and we will always support it.”

But one of the latest news from the People’s Bank of China is that the real estate market as a whole remains healthy.

Therefore, Lu Ting, chief China economist at Nomura Securities, predicts that real estate regulation will not change until at least spring.

— Weizhen Tan of CNBC contributed to this report.

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