Shares of Chinese real estate firms fell further on Thursday as investors fretted about a debt crisis rippling through developers including China Evergrande Group (3333.HK), a day after the sector was hit with fresh rating downgrades. Evergrande, which has more than $300 billion in liabilities and 1,300 real estate projects in over 280 cities, missed the third round of interest payments on its international bonds this week, spooking investors. The world’s most indebted developer, which has been trying to sell assets to raise funds, appeared to have made small progress towards that goal when Qumei Home Furnishings Group (603818.SS) announced in a filing on Thursday that it will buy out Evergrande group’s 40% stake in their furnishings joint venture for 72 million yuan ($11.18 million). But some other Chinese developers recently warned they could default, and rising risks in the sector led rating agency S&P Global to deliver fresh downgrades on Wednesday to two of the sector’s bigger firms, Greenland Holdings (600606.SS) – which has built some of the world’s tallest residential towers – and E-house (2048.HK), and warn it could cut their ratings further.
Adding to the concerns of investors who have increasingly been hoping for policy easing to stabilize a wobbly recovery in the world’s second-largest economy, new data on Thursday showed China’s annual factory gate prices rising at the fastest pace on record in September due to soaring raw material prices. Zhiwei Zhang, the chief economist at Pinpoint Asset Management, said that persistent inflationary pressure would limit the scope of any monetary policy easing. “But the most important policy in the property sector is not monetary policy, but the regulation related to leverage and bank loan supply to developers (and) home buyers,” he said. “Therefore I think the government still has the option to loosen those policies to help the property sector. The big question is whether they are willing to do so. So far their policy stance seems quite firm.” On Thursday, a sub-index tracking shares of Chinese property developers (.CSI000952) fell nearly 3% by midday while the broad CSI300 blue-chip index (.CSI300) slipped 0.31%. Property shares have fallen nearly 19% this year, compared to a 5.5% fall for the CSI300.
Price action in the onshore bond market was relatively muted after large moves in recent sessions. Guangzhou R&F’s 6.7% April 2022 exchange-traded bond rose 0.34% but was still trading at a discount of more than 35% to its face value. Shanghai Shimao Co’s 4.65% January 2022 bond was the biggest loser among Shanghai Stock Exchange-traded corporate bonds, according to exchange data, falling 3.16% to 92.48 yuan. In international debt markets, Agile Group Holdings’ 6.875% perpetual bond was down by more than a cent to 69.5 cents. Markets in Hong Kong were closed on Thursday for a public holiday. Global worries over the potential for spillover of credit risk from China’s property sector into the broader economy kept spread – or risk premium – on investment-grade Chinese firms (.MERACCG), which tend to have the most solid finances, near its widest in more than two months on Wednesday evening U.S. time. The spread on the equivalent high-yield or ‘junk’-rated index (.MERACYC) that tracks firms such as Evergrande pulled back on Wednesday but remained close to all-time highs.