Chinese credit is slowing and the property development segment is diving into a hard landing. The signals are everywhere. Goldman has more:
Evergrande developments the main driver for near term risks. With Evergrande bonds pricing in elevated risks of default, investors are questioning how “fat” the tail risk is for China property bonds. More specifically, could we see defaults pick up for a sizeable number of HY bond issuers? In the near term, we believe much will depend on the developments surrounding Evergrande, and how the company will resolve its credit issues. Given Evergrande’s large amounts of trade and other payables (RMB 951.1bn) and contract liabilities (RMB 215.8bn) outstanding at the end of June 2021, any default that were to disrupt the company’s property development business onshore (e.g., if construction is halted and the delivery of pre-sold properties is interrupted) would likely be negative, affecting homebuyers’ sentiment. Under such a scenario, tail risk concerns may increase. On the other hand, if the company can stabilize their onshore property development business (for example, by bringing in third party investors to assist in a potential debt restructuring), and that the outcome from a potential debt restructuring is not too dissimilar to current market levels, the impact on the China property HY market may be limited.
Policy focus on deleveraging the property sector unlikely to change. Beyond the near term focus on Evergrande issues, the key factor likely to affect tail risk in the China property sector is government policies. We have already seen the implementation of the “Three Red Lines” policy that aims to curb leverage growth for individual developers, and the imposition of curbs on the amount of lending each bank can extend towards the property sector. More recently, stringent rules were implemented that aim to stamp out irregularities within the property sector, as well as the banning of private equity investments into residential real estate. As such, there appears to be no letting up on policymakers’ focus to deliver the property sector, and ensure that “property is for living, and not for speculation”. Therefore, we believe tail risk is here to stay, as regulatory tightening exacerbates credit differentiation, and weaker, higher levered developers will continue to face challenges.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
