Chinese real estate stocks and bonds hit by Evergrande concerns

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SHANGHAI – Stocks and bonds of Chinese real estate companies fell on Thursday, reflecting uncertainty over how a debt crisis will unfold within the China Evergrande group and the wider real estate industry, another developer having been affected by a downgrade in its rating.

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

The world’s most indebted developer, who has tried to sell assets to raise funds, appears to have made small strides towards that goal when Qumei Home Furnishings Group on Thursday announced in a filing that it would buy back the 40% stake in the Evergrande group in their furniture. joint venture for 72 million yuan ($ 11.18 million).

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But a sign of its continuing cash flow problems, Changchun city officials said Evergrande had yet to make the $ 28 million payment for the land it had acquired in the northeast city earlier this week. year.

Other Chinese developers have also warned they could default on bond payments, and mounting risk on Wednesday led rating agency S&P Global to downgrade two of the industry’s largest companies, Greenland Holdings – which has built some of the tallest residential towers in the world – and E- lodge. S&P also said it could lower its ratings even further.

Fitch Ratings issued the latest downgrade on Thursday, reducing Modern Land (China) Co to a single C rating after the developer said it was seeking investor consent to extend a bond’s maturity date by three months. .

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Investors hoped China would ease monetary policy to stabilize its faltering recovery, but data on Thursday showed annual Chinese factory exit prices were rising at the fastest rate on record in September due to the surge. raw material costs.

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

“But the most important policy in the real estate sector is not monetary policy, but regulation related to leverage and the provision of bank loans to developers (and) home buyers,” a- he declared.

“Therefore, I think the government still has the option of relaxing these policies to help the real estate industry,” Zhang said.

“The big question is whether they are ready to do it. So far, their political position seems quite firm.

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On Thursday, a sub-index listing stocks of Chinese real estate developers ended the day down 3.88%, while the large CSI300 blue chip index slipped 0.54%. Real estate stocks have fallen nearly 20% this year, compared to a 5.7% drop for the CSI300.

JPMorgan analysts said Chinese real estate stocks will remain volatile in the near term.

“News of marginal easing is likely to cause a short-term rebound, which, however, may not be very long-lasting due to the likely lingering concerns in the offshore bond market,” they said.

“A more sustainable rally could occur in January 2022, when banks will have a larger quota to grant loans to developers / mortgages.”

Lightning rods

In the Chinese onshore bond market, there was still a lot of price volatility, with bonds from developer Shanghai Shimao listed as both the biggest winners and the biggest losers of the day by the Shanghai Stock Exchange.

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“Real estate bonds are lightning rods,” said a director of a local brokerage firm. In addition to the risk of contagion from Evergrande’s debt, mortgage rates – part of the official effort to curb soaring house prices – is hitting the industry, he said. “Basically, the high turnover of real estate companies is gone. “

In international debt markets, data provider Duration Finance showed that the 6.75% June 2022 bond of Greenland Group Holdings traded more than 3 points at 60.175 cents, and the bond 14.5 Xinyuan Real Estate’s September 2023% fell nearly 8 points to 63.9 cents.

Hong Kong markets were closed on Thursday for a public holiday.

Concerns about the potential for credit risk from the Chinese real estate sector to spill over into the wider global economy have kept the spread – or the risk premium – on quality Chinese companies, which tend to have the weakest finances. stronger, near its widest in more than two months late Wednesday.

The spread on the high yield or junk-rated equivalent index that tracks companies like Evergrande fell back on Wednesday, but remained near all-time highs.

($ 1 = 6.4391 Chinese yuan)

(Reporting by Andrew Galbraith; Editing by Muralikumar Anantharaman, John Stonestreet and Jane Merriman)