Stocks and bonds in China property giants fall to eight-month lows

Shanghai/Sydney — Stocks and bonds in China’s real estate industry fell to around eight-month lows on Monday as fears of a cash crunch at two of the country’s biggest developers, Country Garden and Dalian Wanda, deepened a crisis of confidence in the sector.

The slump suggests the troubles that ignited with China Evergrande two years ago have boomeranged back and reached what many had hoped were the largest and safest players in a business crucial to China’s economy.

State-run Chinese media on Monday reported that the government would “adjust and optimise property policies at an appropriate time” but doubts remain, especially after six months of heavy stock and bond market selling.

The latest slump saw the shares of Country Garden, China’s biggest home builder by sales volumes, fall by 8.7% and those of its services arm plunge almost 18%.

Many of its bonds suffered their biggest fall in international markets in over a year to trade at just 10%-15% of their original face value, signalling worries of an Evergrande-style default.

Shares at rival Longfor dropped 8.5%, while an asset sale at Wanda failed to lift its bond prices as investors waited to see whether the cash reaches bondholders.

“As market sales continue to weaken and policy expectations continue to fall short, it will be difficult for real estate developers to repay bonds by their own operations,” said Yao Yu, founder of credit analysis firm Ratingdog.

Property development has ground to a halt in China as a government crackdown on debts and crumbling public confidence have left builders unable to sell apartments or refinance their dues.

Guidelines promoting “urban redevelopment” published late on Friday left investors underwhelmed but there were signs of a more significant shift on Monday at a Politburo meeting that was held a few days earlier than most China watchers had expected.

Analysts at Morgan Stanley highlighted that the Politburo readout didn’t mention the phrase “property is for living not for speculation” and said it was “necessary to adapt” and that “China should optimise its property policy”.

“This is very important, in our view,” Morgan Stanley’s analysts said. “Investors should recall that the early stage of Covid easing was labelled as ‘optimised’ policy, which led to a complete change of the policy later.”

Downgrades and defaults 

Before the Politburo readout an index of mainland developers fell 6.4% on Monday and recorded its worst session of 2023.

“Everything is falling,” said a Hong Kong debt fund manager, who spoke on condition of anonymity.

“The major thing that we see now is onshore-traded Country Garden bonds going down,” he said. “That is the largest one. People get scared if that one cannot survive.”

Country Garden is a giant with thousands of projects in nearly 300 Chinese cities. A move last week to refinance a 2019 loan facility surprised and unnerved investors and follows a blizzard of ratings downgrades for the firm.

Li Changjiang, the president of Country Garden Services, sold 3.2-million shares of the company last week, reducing his stake to 0.11% from 0.21%.

“Though this is not his first time selling shares of the company, the number of shares sold was one of the largest,” said JPMorgan analysts in a note in which they downgraded Country Garden to “underweight”.

They also cut its price target to HK$0.9 from HK$2.3 and that of Country Garden Services Holdings to HK$6.7 from HK$22.

“Country Garden’s (bond) maturities are still heavy,” they added, pointing out that the firm has nearly $4.9bn (35-billion yuan) of bond payments to make over the next 6 months.

Country Garden’s onshore-traded bonds dropped to less than half of their face value on Monday and its dollar-denominated bonds often owned by international investors fell as much as a third to between 10c and 15c on the dollar.

Wanda, China’s largest commercial developer, was also seeking cash for one of its subsidiaries to make an already-late coupon payment due before the end of a grace period on July 30.

It sold part of another subsidiary to streaming company China Ruyi for $320m, which a source familiar with the matter said would help it to repay a separate $400m bond.

State-backed developer Greenland Holdings has missed repayments again this month, while Sino-Ocean Group has asked bondholders to extended the terms of one of its 2-billion yuan ($278m) bonds due on August 2.

This year’s renewed pressure on the sector comes as China’s home sales have remained depressed despite the country lifting most of its Covid-19 era movement restrictions this year.

Restructuring plans at Evergrande, the poster-child of the sector’s 2021 plunge, are also up before the courts in Hong Kong and the Cayman Islands — cases that could decide how much money battered creditors will eventually be able to recoup.

“Distressed Chinese property developers’ bond restructurings can buy them some room,” Fitch Ratings said in a report on Monday. “But most will continue to face repayment difficulties if home sales do not recover.”

Reuters