Real estate uncertainty continues in China, fueling market anxiety
Apartment listings for sale are displayed at a real estate office in Shanghai, China, on Monday, August 30, 2021.
Kelay Shane | Bloomberg | Getty Images
BEIJING – Sharp volatility in Chinese stocks and bonds keeps investors on edge – These headlines could cause trouble in the sector to spill over into the rest of the economy, according to S&P Global Ratings.
While the decline in Evergrande shares has eased, volatility in other Chinese real estate companies has continued this month.
Thursday, cyst Stocks briefly appeared 20% after News can avoid default. On the same day, Shanghai-traded bonds from developer Shimao fell 30%, reminiscent of the sharp sell-off in the company’s bonds earlier this month.
“Headlines can hit sentiment and drive contagion,” Charles Zhang, senior country manager for Greater China at S&P Global Ratings, said in a report earlier this month.
The danger presented by Zhang is that news reports about defaults, or even the possibility of default, could scare off Chinese homebuyers. This drying up of demand will put developers out of business, along with the builders and other suppliers they work with.
The consensus among economists is that the real estate stagnation has been contained, because it is driven by a top-down government decision to reduce the real estate industry’s debt-reliance. The People’s Bank of China summed up this view in mid-October, He described Evergrande as a unique case, and an affirmation of the overall health of the real estate sector.
But investors are becoming increasingly concerned about how Beijing’s crackdown will actually end. News of the defaults of a much smaller developer, Fantasia, and growing funding problems among other developers, are beginning to exacerbate the sharp sell-off.
The Markit iBoxx Chinese high-yield mortgage index is clinging to monthly gains after a choppy few weeks – including a drop of nearly 18% in October and about 11% in September.
“It’s a really tough time for investors right now, and it’s probably more for bond investors than for stock investors, because what we’re really seeing is a shift in policy unfolding in real time,” the investors told CNBC earlier this month.
Even worse for foreign institutional investors, who are usually more comfortable with detailed messaging from companies and policy makers, the Chinese system tends to rely more on broad government data and cautious corporate disclosures.
This lack of clarity has been a long-standing problem with investing in China-related assets.
Rather than companies making announcements during their worst sell-off earlier this month, James said she often learned how they fared from news reports, days or weeks later. These include meetings with the government.
“I’m not quite sure that regulators and authorities understand the damage this is doing to the offshore market, because a lot of investors won’t come back,” James said.
Research institute Rhodium Group noted in a note on Tuesday that the lack of clarity had exacerbated the situation.
“The most important policy signal was the lack of a signal: the lack of a clear decision on what concrete action should be taken to resolve the Evergrande situation and stem the contagion in the real estate sector,” said analysts at the Rhodium Group.
“Officials downplayed the severity of infection and systemic concerns, made confusing pledges to prevent a full account, and ultimately claimed that the initial policy controls that precipitated the pressure on property were misinterpreted,” the newspaper said.
“If the government intended to build confidence in the direction of financial reform, the result was exactly the opposite,” they said.
For investors left in the dark, the anxiety that followed meant they would rather sell than keep investing.
“The problem is that when you have an impact in the market that far exceeds what anyone was reasonably expecting at the beginning of October, you start to ask, ‘What is the overall impact? Jim Fino, Head of Fixed Income, Asia at AXA Investment Managers, told CNBC earlier this month.
The potential macroeconomic consequences can be significant.
Real estate and allied industries account for about a quarter of China’s economy.
Property represents the bulk of a family’s wealth.
According to S&P, residential land accounts for 85% of local governments’ revenue from the sale of land.
Land sales provide developers with important revenue for local governments because they cannot generate enough tax revenue to pay all of their expenditures, According to the Rhodium Group.
But developers won’t want to buy a lot of land now, because negative investor sentiment is making it difficult for real estate companies to get financing. The business cycle of Chinese real estate companies relies heavily on adequate financing to make sure consumers get the apartments they paid for before completion.
Unlike other industries, Chinese developers relied more heavily on the offshore bond market which gave them access to foreign investors.
But that funding channel is drying up as negative sentiment grows around real estate companies on fears that Evergrande – which owes more than $300 billion – could default.
The number of high-yield Chinese real estate bond deals fell in October to just two, with a total value of $352 million, according to Dealogic. The data showed that this was less than 1.62 billion dollars for 9 deals in September, and 29 deals worth 8.5 billion dollars in January.
The strict financing terms reflect a relatively difficult environment for real estate developers to obtain capital from the mainland as well.
“A lot of easy things can happen through messaging,” James said. “Anyone can come out and say, ‘This is a very important part of our economy and we will always be supportive.'”
But one of the last messages from the People’s Bank of China was that The real estate market is still in good shape overall.
As a result, Ting Lu, Nomura’s chief China economist, does not expect a change in property restrictions until at least spring.
CNBC’s Weizhen Tan contributed to this report.