China’s real estate uncertainties persist, fueling market anxiety
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A listing of available apartments was displayed in a Shanghai real estate office on Monday Aug. 30, 2021.
Getty Images| Bloomberg | Getty Images
BEIJING — Wild swings in Chinese real estate stocks and bonds are keeping investors on edge — these news headlines could cause troubles in the sector to spill into the rest of the economy, says S&P Global Ratings.
While Evergrande’s stock has fallen slightly, volatility at other Chinese real-estate companies continues.
This Thursday KaisaFollowing the announcement, shares rose briefly by 20% news it could stave off default.The same day, the Shanghai-traded Shimao Bond plunged 30%. It was reminiscent of the steep sell-offs in bonds this month.
“Headlines can hit sentiment and drive contagion,” Charles Chang, senior director and Greater China country lead for corporate ratings at S&P Global Ratings, said in a report earlier this month.
Chang warned that Chinese homebuyers could be scared off by news about defaults and the possible default. This would cause developers to lose their business along with other contractors and suppliers who work with them.
According to economists, the real estate slump has been contained since the decision by top officials to limit the reliance of property-related debt on government funds is a consensus. In mid-October the People’s Bank of China summarized this opinion. calling Evergrande a unique case, and affirming the overall health of the property sector.
Investors have become more concerned about the outcome of Beijing’s crackdown. The news about Fantasia falling apart and the growing difficulties of other developers financing their projects accelerated a sell-off.
Because many investors will not return, I don’t think the authorities and regulators are fully aware of the harm this causes to the offshore markets.
Jennifer James
Janus Henderson Investors
The Markit iBoxx index for China high yield real estate bonds is clinging to monthly gains after a volatile few weeks — including a drop of nearly 18% in October and an almost 11% fall in September.
CNBC’s Jennifer James, portfolio manager at Janus Henderson Investors and leading emerging market analyst, stated that it is difficult times for investors.
China’s system is worse than that of other foreign institutional investors. While they are often more comfortable receiving detailed messaging from policymakers and companies, China tends to be more dependent on corporate disclosures and broad government statements.
This lack of clarity has been a longstanding issue with investing in China-related assets.
Left in the Dark: Investors
James explained that she was more likely to hear about the companies’ progress through the worst sell-offs earlier in the month than they are making public announcements. She often found out what their status was via news reports, which were days or even weeks later. This includes meetings with government officials.
James added that James isn’t sure that authorities or regulators understand what the off-shore market has suffered. Many investors are unlikely to return.
In a Tuesday note, Rhodium Group research group pointed out that lack of clarity made the situation worse.
Analysts at Rhodium Group stated that “the most important policy signal was a lack of a decision about what concrete actions to take to solve Evergrande’s problem and stop contagion within the property sector.”
It stated that officials underestimated contagion’s severity and systemic concern and made confused pledges to avoid a full reckoning. Finally, they claimed that initial policies that caused property stress were misunderstood.
According to them, “If the government had intended to boost confidence in financial reform’s direction, it has achieved the exact opposite.”
The anxiety that followed for investors who were left uninformed was enough to make them want to sell rather than stay invested.
“When you see a market effect that is much greater than anyone could have expected, it is a problem. You need to begin asking the question, “What is the macro-impact?” CNBC interviewed Jim Veneau earlier in the month, AXA Investment Managers head of fixed income Asia.
Potential macroeconomic effects can have significant consequences.
About 25% of China’s economy is made up by real estate and related industries.
Most households’ wealth is derived from their property portfolio.
According to S&P, residential land accounts for 85% of local governments’ revenue from selling land.
Local governments need land sales from developers to generate revenue. They don’t have enough tax revenue to cover all of their costs. according to Rhodium Group.
Developers won’t want to purchase as much land right now because of negative investor sentiment, which makes it more difficult for real estate firms to obtain financing. For Chinese real estate firms, sufficient financing is crucial to make sure that customers get their apartments before they are completed.
Funding is hard for developers
Contrary to many other industries in China, Chinese developers relied more heavily upon the offshore bond market which allowed them access overseas investors.
But that channel of financing began to dry up as negative sentiment around the real estate companies increased on the back of concerns that Evergrande — which owes more than $300 billion — might default.
According to Dealogic, the number of Chinese high-yield bonds deals in Chinese real estate plummeted to two, for a total value of $352 millions. The data shows that this is a decrease of $1.62 Billion for nine deals in September and an increase from $8.5 Billion in January’s 29 deals.
The tight funding conditions are a challenge for developers of property to obtain capital on the mainland.
James stated that messaging can lead to many simple things. One can say, “This is an important aspect of our economy. We will always support you.”
The People’s Bank of China has just sent out a message stating that they are working to improve the quality of their banking system. real estate market remains healthy overall.
Ting Lu at Nomura is the chief China economist. He doesn’t expect any changes in property curbs until the spring.
— CNBC’s Weizhen Tan contributed to this report.
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