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China real estate shares, bonds hit by Evergrande concerns

Stock MarketsOct 14, 2021 06:12AM ET
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© Reuters. FILE PHOTO: The company logo is seen on the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China September 26, 2021. REUTERS/Aly Song

By Andrew Galbraith

SHANGHAI (Reuters) - Shares and bonds of Chinese real estate companies slid on Thursday, reflecting uncertainty about how a debt crisis will play out at China Evergrande Group and the wider property sector as another developer was hit by a rating downgrade.

Evergrande, which has more than $300 billion in liabilities and 1,300 real estate projects in over 280 cities, missed a third round of interest payments on its international bonds this week.

The world's most indebted developer, which has been trying to sell assets to raise funds, appeared to have made small progress towards that goal when Qumei Home Furnishings Group announced in a filing on Thursday that it will buy out Evergrande group's 40% stake in their furnishings joint venture for 72 million yuan ($11.18 million).

But in a sign of its continued cash flow problems, municipal officials in Changchun said Evergrande has yet to make $28 million payment for land it acquired in the northeastern city earlier this year.

Other Chinese developers have also warned they could default on bond payments, and rising risks on Wednesday led credit rating agency S&P Global (NYSE:SPGI) to downgrade two of the sector's bigger companies, Greenland Holdings - which has built some of the world's tallest residential towers - and E-house. S&P also said it could cut their ratings further.

On Thursday, Fitch Ratings issued the latest downgrade, cutting Modern Land (China) Co to a single-C rating after the developer said it was seeking consent from investors to extend a bond's maturity date by three months.

Investors have been hoping China would ease monetary policy to stabilise its wobbly recovery, but data on Thursday showed China's annual factory gate prices rising at the fastest pace on record in September due to soaring raw material costs.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said persistent inflationary pressure would limit the scope of any monetary policy easing.

"But the most important policy in the property sector is not monetary policy, but the regulation related to leverage and bank loan supply to developers (and) home buyers," he said.

"Therefore I think the government still has the option to loosen those policies to help the property sector," Zhang said.

"The big question is whether they are willing to do so. So far their policy stance seems quite firm."

On Thursday, a sub-index tracking shares of Chinese property developers ended the day down 3.88%, while the broad CSI300 blue-chip index slipped 0.54%. Property shares have fallen nearly 20% this year, compared with a 5.7% fall for the CSI300.

JPMorgan (NYSE:JPM) analysts said China property shares would remain volatile in the near term.

"News on marginal easing will likely cause a short-term rebound, which, however, may not be very sustainable due to the likely ongoing concerns on the offshore bond market," they said.

"A more sustainable rally may happen in January 2022 when banks have more front-loaded quota to extend credit to developers/mortgages."

Graphic: China property share index https://fingfx.thomsonreuters.com/gfx/mkt/gdpzywdymvw/image-1634186092929.png

LIGHTNING RODS

In China's onshore bond market there was still a lot of price volatility, with bonds of developer Shanghai Shimao listed among both the biggest gainers and biggest losers on the day by the Shanghai Stock Exchange.

"Property bonds are lightning rods," said a director at a local brokerage. Apart from the risk of debt contagion from Evergrande, higher mortgage rates - part of official efforts to rein in surging housing prices - are hitting the industry, he said. "Fundamentally, the high turnover of real estate companies is gone."

In international debt markets, data provider Duration Finance showed Greenland Group Holdings' 6.75% June 2022 bond was trading down more than 3 points at 60.175 cents, and Xinyuan Real Estate's 14.5% September 2023 bond slumped nearly 8 points to 63.9 cents.

Markets in Hong Kong were closed on Thursday for a public holiday.

Worries about the potential for spillover of credit risk from China's property sector into the broader global economy kept the spread - or risk premium - on investment-grade Chinese companies, which tend to have the most solid finances, near its widest in more than two months late on Wednesday.

The spread on the equivalent high-yield or junk-rated index that tracks companies such as Evergrande pulled back on Wednesday, but remained close to all-time highs.

($1 = 6.4391 Chinese yuan)

China real estate shares, bonds hit by Evergrande concerns
 

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Comments (8)
Catharine Varady
Catharine Varady Oct 14, 2021 8:24AM ET
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beijing deliberately does this as anticipation of global recession. in the end, china will come even stronger as usual
jason xx
jason xx Oct 14, 2021 6:18AM ET
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Concerns?? Isn't the company already belly up?
IceIce Baby
IceIceBaby Oct 14, 2021 6:17AM ET
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Will the panic spiral make their financial situation more difficult?
William Bailey
William Bailey Oct 14, 2021 1:37AM ET
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Entire world realEstate market is dead meat !
Darrell Peterson
Darrell Peterson Oct 14, 2021 1:05AM ET
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Nothing negative is insurmountable as long as she zing ping , scary Jerry Powell , and the rest of the evil cabal are alive and well .
William Bailey
William Bailey Oct 14, 2021 1:05AM ET
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Jerome is gone in Feb
Francesco Lucchesi
Francesco Lucchesi Oct 14, 2021 1:02AM ET
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cmon just bail them out. so easy
William Bailey
William Bailey Oct 14, 2021 1:02AM ET
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No liquidity and nobody to buy debt… see a pattern?!
Johnny Crash
Johnny Crash Oct 14, 2021 12:58AM ET
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Who would have thought that building more houses like crazy when population is shrinking would not end well?
Darrell Peterson
Darrell Peterson Oct 14, 2021 12:52AM ET
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com'on , just get it over with , no pain no gain lol .
 
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