Ads of apartments for sale displayed at a real estate agency in Shanghai, China on Monday August 30, 2021.
Qilai Shen | Bloomberg | Getty Images
BEIJING – The sharp swings in Chinese stocks and real estate bonds are keeping investors on the alert – these headlines could cause problems in the sector to spill over into the rest of the economy, according to S&P Global Ratings.
As the fall in Evergrande shares eased, volatility from other Chinese real estate companies continued this month.
Kaisa shares briefly climbed 20% on Thursday after learning they could avoid the default. On the same day, a Shanghai-traded bond from developer Shimao plunged 30%, reminiscent of a massive sell-off in the company’s bonds earlier this month.
“Headlines can touch sentiment and spur contagion,” Charles Chang, senior director and head of corporate ratings for Greater China at S&P Global Ratings, said in a report earlier this month.
The risk Chang has exposed is that information about defaults, or even the potential for default, could scare off Chinese homebuyers. And this drying up in demand would bankrupt developers, as well as construction companies and other vendors who work with them.
The consensus among economists is that the real estate crisis is contained, as it is motivated by a top-down government decision to limit the use of debt in the real estate sector. The People’s Bank of China summed up this view in mid-October, calling Evergrande a unique case and affirming the overall health of the real estate industry.
But investors are increasingly worried about how the Beijing crackdown would actually play out. News of the failure of a much smaller developer, Fantasia, and growing funding issues among other developers, began to exacerbate a sell-off.
The Markit iBoxx index for Chinese high yield real estate bonds is hanging on to monthly gains after a few volatile weeks, including falling almost 18% in October and falling almost 11% in September.
“It’s a really tough time for investors right now, probably more for bond investors than for equity investors, because what we’re really seeing is a political transition happening in real time,” Jennifer James, Portfolio Manager and Chief Emerging Markets Analyst at Janus Henderson. Investors told CNBC earlier this month.
Worse still for foreign institutional investors, generally more comfortable with detailed messages from companies and policymakers, the Chinese system tends to rely more on broad government statements and cautious corporate disclosures.
This lack of clarity is a long-standing problem with investing in China-related assets.
Investors left in the dark
Rather than making announcements to businesses at the height of the sale at the start of the month, James said she often learns how they fare through news reports, days or weeks later. These include meetings with the government.
“I am not entirely sure that regulators and authorities understand the damage this is doing to the offshore market, because a lot of investors are not coming back,” James said.
The lack of clarity has exacerbated the situation, the Rhodium Group research institute said in a note on Tuesday.
“The most significant political signal was a non-signal: the absence of a clear decision on the concrete measures to be taken to resolve the Evergrande situation and stem the contagion in the real estate sector,” Rhodium analysts said. Group.
“Officials underestimated the severity of the contagion and systemic concerns, made muddled commitments to prevent a full calculation, and ultimately claimed that the initial policy disciplines that precipitated the real estate stress had been misinterpreted,” a- he declared.
“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 resulting anxiety meant they preferred to sell rather than stay invested.
“The problem is, when you have an impact in the market that far exceeds what anyone might have reasonably expected in early October, you have to start asking yourself, ‘What’s the macro impact? “Jim Veneau, head of fixed income, Asia at AXA Investment Managers, told CNBC earlier this month.
The potential macroeconomic consequences can be significant.
Real estate and related industries make up about a quarter of China’s economy.
Ownership represents the bulk of household wealth.
According to S&P, residential land accounts for 85% of local government revenue from the sale of land.
Sales of land to developers provide essential revenue for local governments, as they cannot generate enough tax revenue to pay all of their expenses, according to Rhodium Group.
But developers won’t want to buy that much land now, as negative investor sentiment makes it harder to secure financing for real estate companies. The business cycle of Chinese real estate companies relies heavily on sufficient financing to ensure that consumers get the apartments they have paid for before completion.
Developers are struggling to finance themselves
Unlike other industries, Chinese developers have relied much more on the offshore bond market which has given them access to foreign investors.
But that funding channel began to dry up as negative sentiment around real estate companies increased over fears that Evergrande – which owes more than $ 300 billion – might default.
The number of Chinese high-yield real estate bond deals fell in October to just two deals, with a total value of $ 352 million, according to Dealogic. This is down from $ 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 real estate developers to secure capital on the continent as well.
“A lot of easy things can happen with messaging,” James said. “Someone 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 housing market remains healthy overall.
As a result, Ting Lu, chief China economist at Nomura, doesn’t expect a change in real estate restrictions to happen until at least spring.
– CNBC’s Weizhen Tan contributed to this report.