Evergrande news is thick and fast. Some kind of selective bail-out and bail-in is underway depending upon whether you’re Chinese or not. Sincocism:
In a notice seen by the Post, the Housing and Urban-Rural Development Bureau of Xiangyin county in Hunan province on September 19 prohibited Hunan Jinyun Properties Company – an Evergrande project company – from using its project as payment on any debt held by construction companies or individuals that had not bought any units at the development..
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Evergrande, the world’s most indebted developer, has little cash left and has missed payments to suppliers, banks and retail debtholders too. It was due to pay $46 million in interest to holders of an offshore bond by 11:59 p.m. Wednesday New York time, but two investors said on Thursday that they had neither received payment nor any notice from the company.
“It is a repeat of what happened last week,” said one investor who did not receive a payment due Sept. 23 either. “All we have is silence.”
“There is a dilemma in regulating real estate finance,” said a banker who specializes in corporate banking. “On the one hand, regulators can’t throw real estate companies off a cliff on a large scale or increase their risks of default, as this concerns the economy and the general public’s housing issue. It’s likely that regulators in the (Wednesday) meeting asked banks not to demand that property developers repay loans ahead of maturity dates. But on the other hand, if regulators ease lending restrictions too much, housing prices will surge again and people won’t be happy.”
“Financial regulation again mentioned to protect the legitimate rights and interests of housing consumers; ensuring the delivery of buildings may become the focus of policy
The recent policies to “safeguard the healthy development of the real estate market and legal interests of homeowners” do not signal a “u-turn,” reads a commentary in the Economic Daily.
The Chinese recession is gathering pace. Via Goldman:
China’s economic growth has slowed this year – first gradually, and now more suddenly. Our China Current Activity Indicator averaged 10% in the second half of2020, a little below 6% in the first half of 2021, but slid in July and fell into negative territory in August (Exhibit 1). A significant part of the August weakness reflects temporary factors related to the recent Covid outbreak: the GS China EffectiveLockdown Index, our proprietary metric of Covid restrictions, rose to 22 in Augustbut is back to 8 in September to date (0=no restrictions), and the services PMI bounced back sharply to 52.4 in September (from 45.2 in August). But industrial activity in China is likely to weaken further in September, judging from sharp cutbacks in production of some energy-intensive sectors in recent weeks and a notable drop in the official manufacturing PMI.
The recession is led by property. Spreads remain frozen for developers but contagion is at least so far contained:
The leading indicator of land sales is still plunging:
Sales picked up a bit, perhaps helped along by distressed volumes. But seasonally adjusted into Golden Week they got worse:
There is still no offset coming from infrastructure funding:
And the combined effect of crashing property development, weak infrastructure and power rationing to industry has sent steel output into free fall:
Down 21% year on year. Down 24% from the June peak. These falls are epic, in the range of 250-300mt less iron ore needed in annualised terms in September.
There is no end in sight:
- Yes, China is slowly moving to support the economy around the Evergrande black hole. The bail-out/ bail-in is underway.
- PBoC is telling banks to keep lending to developers to prevent contagion from getting out of hand and it is pumping in liquidity. But these measures have not restored developer spreads in bond markets so funding pressures remain acute.
- Land prices must be in free fall and property prices are probably going to roll over as well.
- Infrastructure is down sharply year-on-year, contrary to expectations.
- It is all being made worse by energy shock output curtailments.
China is fighting desperately to not have to cut RRR and policy rates, aware that in doing so it will unleash its impossible trinity and squash the CNY, which will send the weakness global via EM contagion.
But that appears inevitable unless China reverses the real driver of it all – the three red lines policy – which it is absolutely loath to do. If so, it will have no choice but to pull the monetary rip cord.
Goldman wraps it up pretty well:
…we do see continuing uncertainties surrounding the China property sector potentially having broader macro implications. Our China economics team sees three reasons why it is important for clear communication from the government on the plan to contain any Evergrande related spillovers to the broader property sector. First, unlike non-durable goods consumption, confidence plays an important role in households’ decision to purchase homes. When developers’ ability to deliver apartments is in question, presales of properties may fall. Second, housing markets tend to exhibit significant momentum. Once expectations of future price movements are set, it takes months, if not years, to reverse.
Third, with local Covid outbreaks resurfacing from time to time, consumption and service industries are unlikely to rebound sharply. With this backdrop, a sharp deceleration in the property market could exacerbate and amplify the downward pressure on economic growth and labor market. To limit further contagion impact to the China property sector, we believe the primary concern for policymakers is to ensure that Evergrande’s onshore property operations can be maintained as a going concern. Possible options include bringing in third parties to invest in the company and stabilize operations, as there have been examples of similar occurrences in the past. Although there is little clarity on when a potential resolution on Evergrande’s debt problems can be reached, and there remains considerable uncertainty on what the solution would look like, we maintain the view that China policymakers have zero tolerance on systemic risk emerging. This suggests that a near-term solution to stabilize Evergrande’s onshore property operations would be necessary.
Beyond the near term, much will depend on the direction of government policy towards the real estate sector. On that, our China property team thinks that the government is unlikely to reverse the deleveraging efforts in the industry. We do see scope for policymakers to ease up on the implementation of the deleveraging efforts (for example, the three red lines policy was introduced with a 3-year implementation period) to help prevent a broader systemic impact should signs of contagion emerge. But with no deviation from the policymakers’ credit cleanup stance, this suggests tail risk in China property HY will be prolonged. So, whilst we retain our positive view on Asia HY overIG, we would avoid the riskiest credit within China property HY, and BB rated developers.
Avoid China, period.
Finally, that’s advice that glue-sniffing traders need to heed. Just why they charged into the ferrous complex yesterday, on the eve of the Golden Week holiday over which anything could happen, is anybody’s guess:
The China steel PMI showed a slight improvement in the second derivative yesterday but is in an ongoing deep recession nonetheless. I suspect the lift is seasonal as rains passed but it’s still fugly:
There’s still no reason to be anything but very short iron ore.