Chinese developer stocks slide as Evergrande fears simmering

The company logo can be seen at the headquarters of the China Evergrande Group in Shenzhen, Guangdong Province, China, September 26, 2021. REUTERS / Aly Song

SHANGHAI, Oct. 14 (Reuters) – Chinese real estate company stocks and dollar bonds slid again on Thursday as investors worried about a debt crisis struck by developers like China Evergrande Group (3333.HK) a day after the sector was rated downgrades were haunted.

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

The world’s most heavily indebted property developer trying to sell assets to raise funds appeared to have made small strides toward that goal when the Qumei Home Furnishings Group (603818.SS) announced in a filing on Thursday, that she is 40 Evergrande Group will buy a% of its home furnishings joint venture for 72 million yuan ($ 11.18 million).

But some other Chinese developers have also warned of default, and rising risks on Wednesday led credit agency S&P Global to be downgraded to two of the sector’s larger companies, Greenland Holdings (6000606.SS), which have some of the tallest residential towers the world – and E-House (2048.HK) and warn that it could lower their ratings further.

In addition to concerns from investors who have been increasingly hoping for policy easing to stabilize a shaky recovery in the world’s second-largest economy, Thursday’s data showed that China’s annual factory prices were falling faster than ever in September due to soaring commodity prices previously costs rose.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said continued inflationary pressures would limit the scope for monetary easing.

“But the most important policy in the real estate sector is not monetary policy, it is regulation regarding leverage and bank loans to developers (and) home buyers,” he said.

“So I think the government still has an opportunity to relax these policies to help the real estate sector. The big question is whether they are ready. So far, their political stance seems to be pretty firm.”

On Thursday, a sub-index that tracks Chinese property developer stocks (.CSI000952) ended the day 3.88%, while the broad blue-chip index CSI300 (.CSI300) fell 0.54%. Real estate stocks are down nearly 20% this year, compared to a 5.7% decline for the CSI300.

China’s real estate stocks would remain volatile in the short term, JPMorgan analysts said in a report.

“News of minor easing is likely to result in a near-term rebound, but it may not be very sustainable given the likely ongoing concerns in the offshore bond market,” they said.

“A more sustainable rally could take place in January 2022 when banks have more upfront quotas to lend to developers / mortgages.”

China real estate stocks vs. blue chips

LIGHTNING ARRESTER

In China’s onshore bond market, prices underscored the persistent volatility, with bonds from developer Shanghai Shimao (600823.SS) ranking among both the biggest winners and the biggest losers of the day on the Shanghai Stock Exchange.

“Real estate bonds are lightning rods,” said a director at a local brokerage firm. Aside from the risk of Evergrande debt contagion, higher mortgage rates – part of official efforts to contain soaring house prices – would hit the industry, he said. “Basically, the high fluctuation in real estate companies is gone.”

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

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

Global concerns about the potential for credit risk from China’s real estate sector to spill over to the wider economy maintained the dispersion – or risk premium – on investment grade Chinese companies (.MERACCG), which tend to have the most solid finances, almost the highest since more than two months on Wednesday night US time.

The spread of the corresponding high-yield or junk rating index (.MERACYC), which tracks companies like Evergrande, fell on Wednesday, but remained close to all-time highs.

($ 1 = 6.4391 Chinese Yuan)

Reporting by Andrew Galbraith; Adaptation by Muralikumar Anantharaman and John Stonestreet

Our Standards: The Thomson Reuters Trust Principles.

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