(Bloomberg) — The financial transition in China’s property industry is making a comeback, increasing pressure on Xi Jinping’s government to do more to protect the country’s strong developers.
Monday was the worst day on record for dollar bonds of China’s largest developer Country Garden Holdings Co. by sales. Some of its notes fell as much as 62 cents, while its shares fell to near five-year lows. The sell-off also spread to stronger issuers such as Longfour Group Holdings Ltd. And for the first time China Vanke Co., as well as China’s bad-debt managers, amid concerns over their exposure to the property market, traders said.
While panic seemed to spread on Tuesday, developer bonds and stocks pared some of the previous day’s losses, with analysts hoping that unless Beijing works to improve the real estate sector’s access to funding The situation will get worse. According to economists at Citigroup Inc., officials may need to ease restrictions on the use of presale proceeds for funding, as well as address concerns over a planned nationwide estate tax by introducing a nominal levy “as soon as possible”. may be required.
Banks are also widely expected to cut their benchmark rate for mortgage loans on Thursday.
“The spread of the crisis from weak names to investment-grade names shows how long these companies can survive without policy support,” said Anthony Leung, head of fixed income at Metropoly Capital HK. “The best credit may last the longest, but as time passes and support doesn’t come, not even the strongest can survive.”
The rising risk of financial infection underscores the challenge Xi faces in the residential property market, especially at a time when the country’s Omicron outbreak is darkening the outlook for the economy. Xi is seeking to reduce the risk of a real estate meltdown to the financial system as well as bridging the gap between the country’s rich and poor.
“We see an urgent need for the government to stabilize the property sector,” Citigroup Inc. analysts Jiangrong Yu and Xiaowen Jin wrote in Monday’s note. “In particular, it may need to provide credit enhancements for private developers and relax presale fund rules.”
Read more: Contraction of China’s property sector worsens for economyChina cuts interest rate as growth risks worsen with Omicron China’s property market set for a state-dominated ‘age of war’ downgraded by S&P Has gone; Contagion Roars Back: Evergrande Update Chinese Builders’ Funding Won’t Improve Soon: Fitch
Behind the scenes, officials seem to be consolidating the positions of large or state-backed enterprises. In Guangdong – home of defaulters China Evergrande Group and Casa Group Holdings Ltd. – Local authorities recently facilitated meetings between struggling developers and SOEs, local media reported. Borrowing by major developers used to fund M&A will no longer count in the debt limiting metric. In December, a handful of the strongest private sector builders tapped the onshore interbank credit market for funds.
Shanghai Pudong Development Bank’s plan to sell three-year bonds worth 30 billion yuan ($4.7 billion) is the first of its kind from a financial institution to finance the company’s asset acquisition, the China Securities Journal said. According to the report, bookbuilding for the bond will start from Friday.
Despite those efforts, the fact that notes from better-quality developers could fall to crisis levels marks a turning point for investors. Many assumed that firms with strong finances would have no problem accessing offshore bond markets. According to IFR, that perception was challenged when Country Gardens struggled to sell convertible notes last week due to weak demand.
“There is no doubt that this is the darkest chapter ever for China’s offshore dollar bonds,” said Dheeraj Bajaj, head of Asia Credit at Lombard Odier. “Policy ambiguity has reached a critical point for investors, and investors are looking for over-aggressive policy easing.”
Steps such as encouraging state banks to lend directly to distressed developers could help ease tensions in offshore markets. China has so far avoided such instruments, especially as its large onshore credit market remains resilient.
Most funding channels remain paralyzed for China’s stressed developers. China’s junk dollar debt yield rose 20% this month, making offshore markets prohibitively expensive. Weak firms will struggle to sell debt to risk-averse onshore investors. When Sunak China Holdings Ltd. Last week instead tapped equity investors, with its shares falling a record 23% in Hong Kong.
It is becoming increasingly difficult to generate cash. Late last year, several major cities and some smaller municipalities in China tightened supervision over the use of proceeds from previously sold property. According to official data, home sales and prices are falling. Many of China’s largest banks have become more selective about financing real estate projects by local government financing vehicles.
If officials are worried about infection, they are not showing it. On Monday, the head of China’s bureau of statistics shrugged off risks from the housing market, saying he expects steady and “healthy” growth in property investment this year. Central Bank Governor Yi Gang has repeatedly said that the liquidity crisis on developers such as China Evergrande Group will pose a risk to the Chinese economy.
At a scheduled press briefing on Tuesday, People’s Bank of China officials said asset sales and financing were returning to normal, while mortgage loans would be kept “basically stable”.
China’s bad-date managers are also under pressure. According to credit traders, the asset risk of China Huarong Asset Management Co. has declined in their dollar bonds in recent days. The Huarong’s dollar note is set for a ninth consecutive day of decline due to 2030 after the dollar fell 1.2 cents to 89.8 cents on Monday, Bloomberg-compiled prices.
At least seven developers have defaulted on dollar bonds since October. That includes Evergrande, whose crisis has ensnared the world’s worst-performing bank stock China Minsheng Banking Corp. Guangzhou R&F Properties Co. was downgraded last week in a restricted default by Fitch Ratings, which the rating firm called a distressed debt exchange.
Chinese property firms are required to repay or refinance about $99 billion in local and offshore bonds this year. It has less than half of its outstanding dollar debt, data compiled by Bloomberg shows.
– With assistance from Jun Luo and Emma Dong.
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