A listing of apartments for sale displayed at a real estate office in Shanghai, China on Monday, August 30, 2021.
Kilai Shen | Bloomberg | Getty Images
BEIJING – Wild swings in Chinese real estate stocks and bonds have kept investors on edge – as S&P Global Ratings says these news headlines could spread to the rest of the region’s economy.
While shares of Evergrande have eased their losses, volatility at other Chinese real estate companies has continued this month.
on Thursday, How Shares briefly popped after 20% News It can be turned off by default. On the same day, developer Shimao’s Shanghai-traded bond fell 30%, reminiscent of a sharp sell-off in the company’s bonds earlier this month.
In a report earlier this month, Charles Chang, senior director of Greater China Country Lead for Corporate Ratings and Greater China Country Lead at S&P Global Ratings, said, “Headlines can sway sentiment and exacerbate the transition.”
The risk that Chang posed is that news reports about defaults, or even the possibility of default, could scare off Chinese home buyers. And that drying up of demand will put developers out of business, along with construction companies and other suppliers they work with.
The general consensus among economists is that the real estate slowdown is contained, as it is driven by a top-down government decision to limit reliance on debt in the property industry. The People’s Bank of China summed up the idea in mid-October, Describing Evergrande as a unique case, and affirming the overall health of the property sector.
But investors have become concerned about how Beijing’s actions will actually play out. News of a much smaller developer, Fantasia, having defaulted, and growing financing problems among other developers, began triggering a sharp sell-off.
The Markit iBoxx index for China’s high-yield real estate bonds tied for monthly gains after a few weeks of volatility – including a nearly 18% drop in October and a nearly 11% drop in September.
Jennifer James, Portfolio Manager and Lead Emerging Markets Analyst at Janus Henderson, said, “Right now it’s time for investors to really try it, probably more for bond investors than equity investors, because what we’re really seeing is real There is a policy change in time.” investors told CNBC earlier this month.
Worse for foreign institutional investors, generally more comfortable with detailed messaging from companies and policymakers, China’s system tends to rely more heavily on broad government statements and cautious corporate disclosure.
This lack of clarity is a long-standing problem with investments in China-related assets.
Rather than companies announcing during the worst sell-off earlier this month, James said he often found out how they were doing days or weeks later, through news reports. These also include meetings with the government.
“I am not entirely certain that regulators and authorities understand the damage to the offshore market, because there will not be a lot of investors holding back,” James said.
The lack of clarity exacerbated the situation, research institute Rhodium Group reported in a note on Tuesday.
“The most important policy signal was a non-signal: the lack of a clear decision on what concrete actions to take to resolve the Evergrande situation and prevent infection in the property sector,” said Rhodium Group analysts.
“Officials underestimated the severity of the contagion and systemic concern, made confusing promises to stop a full count, and ultimately claimed that initial policy themes that stymied property tensions were misinterpreted,” Said it.
“If the intention of the government is to instill confidence in the direction of financial reform, the result has been just the opposite,” he said.
For investors left in the dark, the ensuing worry meant they would sell rather than stay invested.
“The problem is, when you have a market effect that’s gone much higher than anyone expected in early October, you have to start asking, ‘What’s the macro effect?'” Jim Venue, head of fixed income AXA Investment Managers in Asia told CNBC earlier this month.
The potential macroeconomic consequences could be significant.
Real estate and related industries make up about a quarter of China’s economy.
Property constitutes the bulk of household assets.
According to S&P, residential land accounts for 85% of local governments’ revenue from selling land.
The sale of land to developers provides significant revenue for local governments because they cannot generate enough revenue from taxes to pay for all their expenses, according to rhodium group,
But developers may no longer want to buy that much land, as negative investor sentiment makes it difficult for real estate companies to get financing. The business cycle for Chinese real estate companies depends on adequate financing to ensure that consumers get the apartments they paid for before they are completed.
Unlike other industries, Chinese developers rely more heavily on the offshore bond market giving them access to foreign investors.
But that channel of financing began to dry up as negative sentiment mounted around real estate companies that Evergrande — which owes more than $300 billion — might default.
According to Dealogic, the number of Chinese real estate high-yield bond deals fell to just two deals in October, which totaled $352 million. This is down from a high of $1.62 billion for 9 deals in September and 29 deals in January for January, the data shows.
Those tight financing conditions reflect a relatively challenging environment for property developers to obtain capital even on the mainland.
“A lot of simple things can happen through messaging,” James said. “Someone can come out and say: This is a very important part of our economy and we will always be supportive.”
But one of the latest messages from the People’s Bank of China was that The real estate market overall remains healthy.
As a result, Ting Lu, chief China economist at Nomura, isn’t expecting a change in asset restrictions to come until at least the spring.
— CNBC’s Weizen Tan contributed to this report.