Government curbs on borrowing in China’s property sector have helped set off a spiral of falling home sales, surging corporate bond yields and waning confidence among investors and prospective home buyers. While the past few days have brought a modest improvement in sentiment, the giant
and several smaller peers have already fallen into default and casualties could continue to mount. Here’s where the market stands as 2022 gets under way.
Sales Have Tumbled
Contracted sales, or the value of new contracts that developers signed with home buyers, dropped sharply in the last few months of 2021, causing many property firms to miss their annual sales targets. Contracted sales for the top 100 developers fell 9% for all of last year, according to figures from China Real Estate Information Corp., reflecting declines in both prices and volumes. Official data shows new starts by developers fell more than 11% in 2021 and property investment tailed off in the later part of the year.
Dollar-Bond Defaults Have Ballooned
Chinese developers that collectively have tens of billions of dollars of international bonds outstanding have failed to repay investors as promised. Some have missed interest or principal payments, while others have cajoled bondholders to swap debt for less attractive new securities. This process, known as a distressed debt exchange, is often considered equivalent to defaulting by rating companies and investors.
The Bond Market Is Separating the Weak From the Strong
Investors have dumped bonds from financially weaker developers, like Evergrande, indicating deep skepticism that these debts will be repaid in full. The selloff has fed a vicious circle, all but closing the market for new bond sales and thus making it more likely that many struggling developers will have to default on debts that they can’t refinance.
Some stronger developers with state backing, like
China Vanke Co.
, have been relatively unscathed. But the volatility has spread, and big real-estate groups with comparatively high credit ratings that don’t have state backing, like
, and more recently
, have also seen large swings in their bond prices recently.
And Property Stocks Have Crashed
The debt-market malaise is grabbing headlines in part because Chinese property makes up such a big part of the Asian junk-bond market and because investors are eager to see how foreign bondholders are treated. But the sudden downturn has also fed steep selloffs in the stocks of many Hong Kong-listed Chinese developers.
On the Bright Side, Home Price Declines Look Modest
Recent official statistics show that prices for new homes have begun to fall, in their first pullback since early 2015, although the decline moderated in December. Statistics for 70 major cities show secondhand home prices are also edging lower. Some local governments have introduced measures to prop up prices, including extending subsidies and warning developers against offering big discounts.
…And Some Lending Data Appears to Be Improving
Chinese authorities have softened some of their rhetoric on property, suggesting they are wary of overdoing their assault on what is a major driver of Chinese growth. The People’s Bank of China recently cut some key interest rates, including a five-year lending rate that is commonly used as a reference for pricing mortgages, as part of a wider shift to ease policy. The central bank has begun detailing monthly increases in mortgage lending—which totaled 401 billion yuan in November, or roughly $63 billion—apparently to reassure markets that both supply and demand for home loans remain healthy. Broader household credit data tells a similar story.
Still, the Pain Isn’t Over Yet
Developers have a mountain of offshore debt to refinance in the first few months of this year. While the heavyweight Country Garden was recently able to sell convertible bonds, selling new debt or convertible bonds won’t be an option for most companies. And regulators have also made it hard for companies to redeploy the cash that sits within individual projects, since most of that was provided by home buyers as prepayments for unfinished units. Recent reports that China could make it easier for developers to access that cash helped spur a slight recovery in stock and bond prices, but some analysts and investors are skeptical about how much difference this will make in practice.
For companies that can’t quickly find alternative sources of funding—such as by selling assets or getting new loans or equity funding from rich controlling shareholders—the next stop could be either a full default, or coercing bondholders into a debt swap.
—Anniek Bao contributed to this article.
Write to Quentin Webb at firstname.lastname@example.org
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