Stocks and bonds in China’s real estate industry reached their lowest levels in around eight months on Monday due to concerns about repayment issues at two major developers, further deepening the crisis in the sector. Giants Country Garden (2007.HK) and Dalian Wanda are facing cash crunches, indicating that even the largest and safest players in the industry are struggling. This is a significant problem considering that the real estate sector used to contribute a quarter of China’s GDP. Doubts are growing about the possibility of official support, and investors do not anticipate any aid being directed towards shareholders.
Country Garden shares fell 6% to an eight-month low, and shares in its services arm (6098.HK) dropped 16%. Additionally, Country Garden dollar bonds fell to less than a fifth of their face value. Rival company Longfor (0960.HK) also experienced a 10% drop in shares. Despite an asset sale at Wanda, bond prices did not recover as investors remained uncertain about whether the cash would actually reach bondholders.
Yao Yu, the founder of credit analysis firm Ratingdog, stated that real estate developers will find it difficult to repay bonds through their own operations due to weakening market sales and falling policy expectations. This has led to increasing pessimism among investors. Property development in China has come to a halt due to a government crackdown on debts and declining public confidence, leaving builders unable to sell apartments or refinance their dues.
Late Friday’s guidelines promoting urban redevelopment were seen as insufficient, leaving investors hoping for more substantial measures from an upcoming Politburo meeting. The fact that major players in the industry are struggling highlights the severity of the problems. The mainland developers’ index (.HSMPI) fell 5.5% on Monday, marking its worst session of 2022.
A Hong Kong debt fund manager, speaking anonymously, expressed concern about the overall decline in the market. The onshore-traded Country Garden bonds are particularly worrying, as their decline could have significant implications for the industry.
Country Garden, a giant in the industry with numerous projects across nearly 300 Chinese cities, surprised and unnerved investors with its move to refinance a 2019 loan facility. This comes after ratings downgrades and new defaults in other companies. Country Garden’s onshore-traded bonds fell to less than half of their face value, and dollar bonds due in 2025 and 2031 dropped below 20 cents on the dollar.
China’s largest commercial developer, Wanda, is also facing cash shortages, with one of its subsidiaries struggling to make a coupon payment. To address this, Wanda sold part of another subsidiary to streaming firm China Ruyi (0136.HK) for $320 million, which will help repay a separate $400 million bond. State-backed developer Greenland Holdings (600606.SS) has missed repayments, and Sino-Ocean Group (3377.HK) has proposed extended terms for a bond due in August.
These new troubles have dashed hopes of a recovery in the real estate market following the lifting of COVID-19 controls and border restrictions. Evergrande, which experienced significant funding stress in 2021, is still undergoing restructuring plans that are before courts in Hong Kong and the Cayman Islands. Additionally, property sales are experiencing a new slowdown.
Fitch Ratings stated in a report that distressed Chinese property developers may find some relief through bond restructurings, but they will continue to face repayment difficulties if home sales do not recover for an extended period.
In conclusion, the real estate industry in China is facing a deepening crisis as major developers struggle with repayment issues and declining market confidence. The lack of official support and the ongoing challenges in the sector have led to significant declines in stocks and bonds. The future of the industry remains uncertain, and investors are becoming increasingly pessimistic.
