Lists of apartments for sale will be displayed at a real estate office in Shanghai, China, Monday, August 30, 2021.
Qilai Shen | Bloomberg | Getty pictures
BEIJING – Wild fluctuations in Chinese real estate stocks and bonds keep investors on top – these news headlines can cause problems in the sector to spill over into the rest of the economy, says S&P Global Ratings.
While the decline in Evergrande’s shares has slowed, volatility in other Chinese real estate companies has continued this month.
On Thursday, Kaisa the shares rose shortly after by 20% news it can ward off default. On the same day, a Shanghai-traded bond from developer Shimao fell 30%, reminiscent of strong sales of the company’s bonds earlier this month.
“Headlines can drive sentiment and drive contagion,” said Charles Chang, senior director and head of business ratings at S&P Global Ratings, in a report earlier this month.
The risk that Chang presented is that news reports on payment cancellations, or even the risk of cancellation, can scare away Chinese home buyers. And that a dehydration of demand would put developers into bankruptcy, along with construction companies and other suppliers working with them.
Consensus among economists is that the real estate downturn is contained, as it is driven by a top-down government decision to limit dependence on debt in the real estate industry. The People’s Bank of China summarized this view in mid-October, Evergrande calls a unique case and confirms the general health of the real estate sector.
But investors have become increasingly worried about what Beijing’s strike would actually look like. News of a much smaller developer, Fantasia, and growing funding problems among other developers, began to exacerbate strong sales.
I’m not entirely sure that regulators and authorities understand the damage this is doing to the offshore market, as many investors are not coming back.
Janus Henderson Investors
The Markit iBoxx index for China’s high-yield real estate bonds clings to monthly gains after a few volatile weeks – including a decline of almost 18% in October and a decline of almost 11% in September.
“It’s a really trying time for investors right now, probably more for bond investors than equity investors, because what we’re really looking at is a real-time policy shift,” Jennifer James, portfolio manager and lead growth analyst for Janus Henderson Investors, told CNBC earlier this month.
Even worse for foreign institutional investors, usually more comfortable with detailed announcements from companies and decision makers, China’s systems tend to rely more on broad government statements and cautious corporate revelations.
This ambiguity has been a long-standing problem with investments in China-related assets.
Investors left in the dark
Instead of companies announcing during the worst sales earlier this month, James said she often found out how they were doing through news reports, days or weeks later. These include meetings with the government.
“I’m not entirely sure that regulators and authorities understand the damage this is doing to the offshore market, as many investors will not return,” says James.
The ambiguity exacerbated the situation, the research institute Rhodium Group pointed out in a notice on Tuesday.
“The most important political signal was a non-signal: the absence of a clear decision on what concrete measures to take to resolve Evergrande’s situation and stop the spread of infection in the real estate sector,” said analysts at Rhodium Group.
“Officials underestimated the seriousness of the spread of the disease and systemic unrest, made confusing promises to prevent a full bill, and finally claimed that the initial policy disciplines that triggered the real estate stress had been misinterpreted,” it said.
“If the government intended to build confidence in the direction of financial reforms, the result would have been the exact opposite,” they said.
For investors who were left in the dark, the ensuing concern meant that they would rather sell than stay.
“The problem is when you have a market impact that has gone far beyond what anyone would reasonably have expected in early October, you have to start asking ‘What is the macro effect?'” Jim Veneau, Head of Interest Income, Asia at AXA Investment Managers, said for CNBC earlier this month.
The potential macroeconomic consequences can be significant.
Real estate and related industries account for about a quarter of China’s economy.
Real estate accounts for the majority of households’ wealth.
According to S&P, residential land accounts for 85% of the municipalities’ income from selling land.
Land sales to developers provide important revenue for local authorities because they can not generate enough tax revenue to pay all their expenses, according to the Rhodium Group.
But builders will not want to buy so much land now, as negative investor sentiment makes it harder for real estate companies to get financing. The business cycle for Chinese real estate companies is heavily dependent on sufficient financing to ensure that consumers get the apartments they paid for before they are completed.
Developers are struggling to get funding
Unlike other industries, Chinese developers relied much more on the offshore bond market which gave them access to foreign investors.
But that financing channel began to dry up when negative feelings about real estate companies increased due to fears that Evergrande – who owes more than $ 300 billion – could go bankrupt.
The number of Chinese real estate deals with high-yield bonds fell in October to just two deals, worth a total of $ 352 million, according to Dealogic. That’s a decrease from $ 1.62 billion for 9 deals in September, and a maximum of 29 deals worth $ 8.5 billion in January, the data showed.
The tight financing conditions reflect a relatively challenging environment for property developers to obtain capital on the mainland as well.
“A lot of simple things can happen through messaging,” James said. “Someone might come out and say, ‘This is a very important part of our economy, and we will always be supportive.’
But one of the latest announcements from the People’s Bank of China was that The real estate market is generally still healthy.
As a result, Ting Lu, China’s chief economist at Nomura, does not expect any change in property edges to come until at least spring.
– CNBC’s Weizhen Tan contributed to this report.