It’s on like Donkey Kong for Chinese developers. Evergrande is going out of business and other weak players are being sucked in:
A worsening selloff in China Evergrande Group’s dollar bonds is once again spreading to other developers, raising the stakes for Chinese authorities as they mull whether to support billionaire Hui Ka Yan’s embattled property empire.
One of the company’s most widely held bonds is indicated at 28.2 cents on the dollar Thursday, set for a record low, after plunging nearly 6 cents the previous day. The rout — triggered by Evergrande’s warning of a potential default if its asset-sale plans fail to materialize — is prompting a selloff in the bonds of other weaker-rated property firms.
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Collateral damage has been so far concentrated in junk-rated developers including Fantasia Holdings Group Co. and Guangzhou R&F Properties Co. The latter company’s dollar note due 2024 fell 6.5 cent to 60.3 cents, according to Bloomberg-compiled prices. Declines in the broader Chinese high-yield space ranged from 0.25 cent to 0.5 cent on the dollar, according to credit traders, extending the previous day’s drop.
There is some slightly better news in equity where markets have begun to sift who is at risk and is not:
There is still no sign of panic in policymakers:
China ramped up financial support for small businesses and pledged better use of local government bonds as the economy showed further signs of a slowdown because of tight property controls and fresh virus outbreaks.
The People’s Bank of China will provide 300 billion yuan ($46.4 billion) of low-cost funding to banks so they can lend to small and medium-sized companies, according to a statement released after a Wednesday meeting of the State Council, China’s equivalent of a government cabinet. Other measures include interest subsidies to firms hit hard by the pandemic and a bigger role for local special bonds in driving investment.
This is precisely the kind of incremental support that will do little to nothing. Especially since the heat on property is still being dialed up without insufficient offset. Yuan Talks:
The Ministry of Finance said over the weekend in its semi-annual fiscal policy report that there has not been enough fiscal spending this year, and it has fallen short of expectations.
January-July fiscal spending, which is associated with infrastructure construction and public procurements, grew only 3.3 per cent from January to July – the second-lowest increase in 30 years. Meanwhile, only 1.35 trillion yuan worth of local special-purpose bonds were issued – less than 40 per cent of the projected annual total.
In the first eight months, local governments issued a total of 1.77 trillion yuan of new special-purpose bonds, accounting for only 48.6 per cent of the annual quota, according to data from Wind Information.
GF Securities estimated that in the period of September – December this year, Chinese government is expected to issue a net about 3.5 trillion yuan of bonds, including 1.9 trillion yuan of local government bonds and 1.6 trillion yuan of treasury bonds, about 900 billion yuan higher than 2.6 trillion yuan in the same period in 2020.
The State Council meeting came after Chinese central bank said in a meeting earlier this month that “more efforts are needed to keep steady credit growth,” which, many believe, indicates the authority is concerned about weak credit demand as economic recovery loses momentum and is likely to take actions to loose credit condition.
“As the global Covid-19 pandemic continues to evolve, China’s external environment is becoming increasingly severe and complex and the domestic economic recovery is still not solid and uneven,” said the central bank.
Yi Gang, Governor of the PBOC, emphasized that the central bank will “step up credit support to the real economy, in particular medium and small-sized companies, and increase the stability of overall credit growth.”
Xu Wei, a researcher with the Development Research Centre of the State Council, warned of the downward pressure. “It is necessary to increase the proactive fiscal policy support at an appropriate time,” he said in an online article.
“Beijing may maintain its policy mix of targeted tightening and universal easing,” Ting Lu, Nomura’s chief China economist, said on Tuesday.
However, “the ongoing monetary and fiscal-easing measures appear insufficient to reverse the growth downtrend, as the drag from a cooling property sector is too strong to be fully offset,” he added.
Precisely. The problem is LGSPVs are probably falling short because declining property hits local government demand for debt. Mizuhno:
A slowing August barely helped by the RRR cut
China’s soft PMI readings in August further add to worries of a slowing economy amid earlier domestic COVID outbreaks and ongoing disruptions in global shipping. In particular, the new order index fell below the expansion threshold of 50 for the first time since the pandemic started. For August, we expect trade growth to be dampened by soaring shipping costs. Despite July’s RRR cut, loan growth is likely to stay soft on existing property tightening measures, but total social financing should be supported by accelerating government bond financing. For economic activity indicators, further moderation is expected, albeit there has been some improvement in high-frequency data towards end-August.
That TSF forecast is still way down on last August and would do nothing to calm anybody.
In short, the Chinese property sector, once described as “the most important market in the world”, and certainly the only one that matters to commodities, is nose-diving into a hard landing.