New data today shows that the Chinese property market is faltering under the weight of a weak September sales and a surprise default. The Shanghai Composite Index has fallen by more than 10% since its high in January, with analysts warning that China’s economy could be in for a rough ride as it grapples with trade tensions with the United States.
The alibaba ant is a Chinese Property Bonds that have been hammered by weak September sales and a surprise default.
Investor worries about China’s property developers have been fanned by falling apartment sales and an unexpected default, prompting a sharp selloff in U.S. dollar bonds from several of the sector’s debt-ridden firms.
Traders reported on Wednesday that the price of dozens of dollar bonds issued by Chinese real-estate firms had dropped, causing yields on those bonds to rise. The selloff continued steep losses seen the day before, indicating growing investor skepticism after the failure of luxury developer Fantasia Holdings Group Co. to repay $206 million in dollar notes due on Monday.
After troubled property giant China Evergrande Group ran out of funds and was forced to stop development on several of its unfinished residential projects, certain developers’ sales statistics for September indicated a substantial decline in home-buyer interest.
According to experts, the low figures reflect China’s wider attempts to control the housing market, while Evergrande’s troubles may have made Chinese people less eager to put money down for new houses constructed by other private developers.
The value of debt issued by businesses including Kaisa Group Holdings Ltd., Redsun Properties Group Ltd., and Yuzhou Group Holdings Co. has plummeted. According to Tradeweb, an 11.25 percent Kaisa bond due in April 2022 had fallen to less than 73 cents on the dollar by late Wednesday in Hong Kong, down from more than 86 cents at the start of Tuesday.
On Wednesday, an ICE BofA index of high-yield dollar bonds issued by Chinese firms yielded more over 18 percent, the highest in almost ten years. A significant portion of the gauge is made up of property bonds.
On Tuesday, the ICE BofA index of high-yield dollar bonds issued by Chinese firms showed a yield of more than 17%, the highest in almost ten years.
Photo credit: Shutterstock/Jerome Favre
“Trading has been a flurry of activity. “It’s been extremely turbulent; markets are very concerned,” Michel Lowy, CEO of SC Lowy, a financial firm that specializes in distressed and high-yield debt, said. “It’s not only Fantasia,” says the narrator. That was significant, but seeing developers report dreadful September sales figures isn’t helping matters,” he said.
According to Paras Gupta, head of discretionary portfolio management for Asia at Union Bancaire Privée, the selling has extended to bonds issued by Chinese developers with a stronger financial position. “This industry now has a full-fledged risk aversion,” he added.
According to Tradeweb, a bond due in 2031 from Country Garden Holdings Co., one of China’s bigger and more financially stable developers, was quoted at around 88.75 cents on the dollar on Wednesday.
Fantasia’s bond failure, which came only days after Evergrande missed a second interest payment due on a pair of dollar notes, was the primary catalyst for the recent losses. While Evergrande’s offshore investors have a 30-day grace period before declaring a default, Fantasia’s bond matured Monday with no grace period.
Investors were shocked by Fantasia’s nonpayment since the Shenzhen-based developer had previously said that it had no liquidity problems and that it had adequate cash to pay down a five-year dollar bond it issued in 2016. In recent years, Fantasia, like Evergrande, has been a prolific issuer of high-yield dollar bonds.
Some market players speculated that Fantasia and its controlling owners had decided not to repay the company’s foreign debt, raising concerns about whether other Chinese developers might do the same to save money or give onshore creditors precedence.
“The recent incident has shaken market confidence, prompting investors to reconsider sponsors’ readiness to pay,” said Jenny Zeng, co-head of Asia Pacific fixed income and a portfolio manager at AllianceBernstein in Hong Kong.
She said that almost half of China’s high-yield property bonds were now trading at rates of more than 20%, indicating a significant risk of default for such firms and making it difficult for them to refinance future obligations.
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According to CCB International analyst Lung Siufung, September was probably the worst September for industry sales in the last 20 years, adding that September and October are usually the peak months for house sales in China.
Mr. Lung noted that average contractual sales for major developers fell 28 percent in September compared to September last year, citing data from CRIC, a data source.
Individual developers have also experienced significant sales declines. Kaisa, a Hong Kong-listed company, said this week that contractual sales in September reached 5.7 billion yuan ($884.3 million). This was a 28 percent decrease from a month ago.
Evergrande, on the other hand, has previously warned of a sharp decrease in September contractual sales due to summer losses.
Junk bond prices are increasingly indicating that investors anticipate additional bond defaults by Chinese developers.
“The market is expecting the worst, and without government action, the level of difficulty priced into assets may materialize,” said Paul Lukaszewski, Asia Pacific head of corporate debt at asset management company Abrdn.
Several steps, according to Mr. Lowy of SC Lowy, may assist calm the market, including government policy easing, developers paying off maturing dollar debts as pledged, and Evergrande and Fantasia laying out realistic restructuring plans.
Evergrande Group of China: Stalled Construction and Huge Debts
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Bond markets today have been hammered by weak September sales and a surprise default. Reference: bond markets today.
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