On October 18, Chinese property shares fell while Beijing pushed ahead with plans for a property tax. All that happened amid fresh signs of weakness in the real estate market.
Nonetheless, to offset the overall bearish mood in the property sector, Chinese developer Kaisa Group’s (1638.HK) coupon payment for a dollar bond and the central bank’s efforts to calm nerves over China Evergrande Group’s (3333.HK) debt woes helped in part.
The CSI300 Real Estate Index (.CSI000952) tracks China’s biggest developers and it fell by 2.6%.
Hong Kong property shares fared a bit better, with an index tracking mainland property firms (.HSMPI) trading flat.
According to an essay in the ruling Communist Party journal Qiushi, China’s President Xi Jinping on October 15 called for the nation to “vigorously and steadily advance” legislation for a property tax, which could curb rampant speculation.
One economist at Sealand Securities, Rocky Fan, said that property tax expectations are negative for real estate shares because:
“people would balk at buying properties and take a wait-and-see attitude, hurting developers’ revenues.”
Fears of contagion rock global financial markets over a liquidity crisis at Evergrande, which has more than $300 billion in liabilities.
On Sunday, Yi Gang, the people’s Bank of China Governor said the economy faces challenges such as default risks for certain firms due to “mismanagement”, and that authorities are keeping a close eye “so they do not become systematic risks”.
The spillover effect of Evergrande’s debt problems on the banking system was controllable and individual financial institutions’ risk exposures were not big, another PBOC official said on Friday.
Even though investors reacted favorably to the PBOC’s comments on Friday, some analysts are not as optimistic.
In a research note, JP Morgan wrote:
“The PBOC is downplaying the market impact of Evergrande’s default.” The bank added that it thinks Evergrande’s problems are not isolated but represent an industry-wide problem.
“The policymakers have the levers to contain the spillover risk; but if no policy action is taken, the risk of further deterioration should not be under-estimated, which may lead to investment slowdown, weaker consumption, fiscal problems for local governments, and broader financial sector pressure.”
Data showed on October 18 that, in the third quarter, China’s economy expanded 4.9%, slower than expected, and industrial output also missed expectations.
According to Reuters calculations based on data released by the National Bureau of Statistics, new construction starts in September slumped for a sixth straight month, the longest spate of monthly declines since 2015.
Major onshore developers like China Vanke (000002.SZ) and Poly Development (600048.SS) were both down by over 3%. Real estate shares (.CSI000952) have declined 22% so far this year.
Hong Kong-listed shares of top developers Country Garden (2007.HK) and Sunac China (1918.HK), however, climbed 1.4% and 4.2%, respectively.
As Kaisa Group’s notes due June 2024 jumping over 6% to 54.34 cents on the dollar, Chinese developers’ offshore bonds also rallied. A bond of Yuzhou Group (1628.HK), Zhongliang Holdings (2772.HK) and Zhenro Properties (6158.HK) all gained around 7%.
Kaisa had paid $39.4 million worth of coupon for a dollar bond due October 16, it told Reuters on Monday. The company now plans to transfer funds for a coupon worth $35.85 million due October 22 into bondholders’ accounts on Thursday.
However, the corporate family rating (CFR) of Kaisa was downgraded on Monday to “B2” from “B1” by rating agency Moody’s, while placing all its ratings on review for further downgrade. The latest downgrade was made citing weakening liquidity and rising refinancing risk expectations over the next six to 12 months amid tight funding conditions and the company’s large debt maturity.
Last week, Sinic Holdings (2103.HK), which has a $246 million bond maturing on Monday, said it would likely default. In addition to Fantasia Holdings (1777.HK) missing a payment early this month, it has another $21.44 million coupon that was due on Monday.