We need a new website to start tracking this. I suggest the URL www.fuckeddeveloper.com. It’ll be a smash hit for the next few years:
Moody’s Investors Service, Fitch Ratings and S&P Global Ratings have cut Chinese builders’ ratings a combined 91 times through Sept. 30, triple the number of this year’s upgrades. That’s already a record full-year count of downgrades.
China Evergrande Group remains in the spotlight, with some holders of dollar bonds with interest payments due Monday saying they had yet to receive them. The latest payment uncertainties came after the embattled firm missed initial coupon deadlines for two other offshore bonds last month.
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In a fresh sign of official concern about the property sector’s health, the China Real Estate Association is reported to be planning a symposium with developers Friday to learn about the risks the companies are facing.
Ah yes, ratings agencies. Always the last to the party. Funding spreads continue to, ahem, widen. We’re fast approaching GFC spreads. Is this a Lehman moment? Why, yes!
Sinic Holdings Group Co. has become the latest Chinese real estate firm to warn of imminent default, as rising contagion risk leaves investors guessing who else may face a credit crunch.
In terms of individual firms, it is carnage:
There is nothing here but more defaults, more crashing sales and more doom loop into funding spreads. ]
Yet Chinese authorities are not only refusing to stimulate, they are tightening further, prudentially:
Chinese President Xi Jinping is zeroing in on the ties that China’s state banks and other financial stalwarts have developed with big private-sector players, expanding his push to curb capitalist forces in the economy.
Mr. Xi, who started his campaign late last year with a regulatory assault on private technology giants, is launching a sweeping round of inspections of financial institutions. According to people with knowledge of the plan, the inspections, announced in September with few details, focus on whether state-owned banks, investment funds and financial regulators have become too chummy with private firms, especially some that have recently landed in Beijing’s crosshairs, such as property giant China Evergrande Group, ride-hailing company Didi Global Inc. and financial-technology firm Ant Group.
The examination, which is led by China’s top anticorruption agency and centers on 25 financial institutions at the heart of the Chinese economy, is the most extensive of a sector Mr. Xi has been suspicious of since coming to power nearly a decade ago. It is part of his broad effort to steer China’s economic system away from Western-style capitalism in the run-up to a leadership transition late next year, when Mr. Xi is expected to sidestep convention and continue his rule beyond the usual two five-year terms.
Starting this month, graft-busters from the Central Commission for Discipline Inspection are fanning out through the offices of the 25 state institutions, reviewing files of their lending, investment and regulatory records and demanding answers to how certain deals or decisions related to the private firms were made, according to the people familiar with the plan.
…Amid the uncertainty, many banks are already pulling back from lending to private developers and other businesses, analysts said.
“When uncertainty goes up, the only way to react is to stop doing what you’re doing,” said Michael Pettis, a finance professor at Peking University. But a slowdown of economic activity in the private sector—from tech giants unsure of the regulatory climate to private developers whose lending spigot is cut off—presents a dilemma for Beijing. “Without ‘bad’ lending, you’re not going to achieve the growth target,” Mr. Pettis said.
That could force the government to step in with its old stimulus playbook of ramping up state lending for infrastructure investments—deepening imbalances that leaders have pledged to address that tilt lending away from the private sector.
Holy crap. Does anybody lend to Chinese developers on the basis of anything other than graft? These are the same 25 banks that the PBoC two weeks ago instructed to lend to prevent a property rout, the policy banks that prevent Chinese recessions. The banks that will lend when nobody else will.
Developers have already lost access to foreign funding. They are losing pre-sales revenue as shocked demand craters. They will have lost access to private banks. This is Xi cutting the development sector’s last lifeline in policy banks. These are all feeding on one another in a doom loop.
As for the great infrastructure offset, good luck with that:
China’s land sales revenue is expected to slow down and that will add fiscal pressure on local governments with high reliance on land sales and heavy debt loads.
Moody’s Investors Service said in a report on October 11 that the growth of the country’s land sales revenue will slow down this year and is expected to decline in 2022.
In the past one year, Chinese authorities have been tightening financing rules for real estate developers in a bid to lower financial risks in the sector. Many developers are forced to shift the focus from expanding business scale to maintain stable cash flows. Toe achieve that, many of them have slashed spending on land acquisitions.
Data from local governments showed a sharp cooling in land markets recently, with significantly more failed auctions.
According to Moody’s report, among the cities that have held the second round of land auctions this year, more than half of the land parcels offered saw auction cancelled, delayed or failed due to a lack of market interest. Among the land successfully sold, about third-quarters changed hands at reserves prices without any premium.
The situation was even seen in tier-one cities, where housing markets are thought to be more resilient that lower-tier cities. For instance, of the 42 land parcels offered in the recent land auction in the city of Beijing, 27 land parcels failed to attract any bids. In South China’s Guangzhou city, among the 48 land parcels offered in the recent auctions, 25 land parcels saw failed auctions and among the 23 lands sold, only 5 changed hands with price premium.
Sluggish land transactions and increasing failed auctions point to weak demand from property developers and their increasingly cautious attitude in land acquisitions, Moody’s said.
The rating agency expects the growth of China’s land sales revenue to slow to below 10 per cent this year, compared to above 10 per cent in the first half of the year.
According to data from the Ministry of Finance, China’s land sales revenue reached 570.3 billion yuan in August, sliding 17.5 per cent from the same period last year, falling for the first time this year. The ministry will release September data later this month.
According to Moody’s, the downtrend will extend into next year. If the government does not adjust real estate policies, the country’s total land sales revenue could drop by more than 20 per cent in 2022 and even if policies are adjusted to prevent sharp contraction in local government revenue, next year’s land sales revenue will still be lower than 2021-level.
Land sales is a main revenue source for local governments. According to statistics by GF Securities, the revenue accounted for 30 – 40 per cent of their total fiscal revenue and more than 40 per cent of the land sales revenue are used for local infrastructure projects.
Consider where we are:
- Xi’s shock troops appear determined to crush the property bubble to restructure the economy (or they’re making a major policy error) in a swift adjustment that gets China off the foreign commodity tit.
- The power crisis is making it impossible to stimulate anyway, probably until 2022.
- Negative spillovers will include infrastructure, and, before long, consumption as house prices roll over.
There is a tipping point in this somewhere, a point of no return when the adjustment takes on a life of its own. If we go over it – and Xi cutting off policy bank funding for developers sure looks like a good candidate – then a full-blown, high momentum, construction crash will shake the foundations of the contemporary Chinese and global economies.
Now, go back to buying those commodities!