China’s real estate uncertainty continues to increase market anxiety

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.

Thursday, Kaisa After that, the stock price rose briefly by 20% Message it can avoid breach of contract. 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 is 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 of a much smaller developer Fantasia’s default, and 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 severity of contagion and systemic concerns, made confusing promises to prevent full liquidation, and eventually claimed that the original policy discipline that caused the pressure on real estate 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.

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.

According to Dealogic’s data, 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.

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