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July 22, 2022
The housing woes in China are hitting every corner of the industry, with distress signs once again flashing in debt markets.
Prices of high-yield dollar notes are just a whisker away from a record low seen four months ago, according to a Bloomberg index, as fears grow that a liquidity crunch among developers will hurt banks and ripple through healthier companies.
Cash-strapped builders halted construction on numerous developments, spurring homebuyers to boycott mortgage payments across more than 300 projects while suppliers have stopped repaying loans due to unpaid bills. Pessimism looks so entrenched that a property firm which received a state rescue in May suffered record losses in a dollar bond this week, fueling a selloff that’s engulfed investment-grade peers including China Vanke Co.
“Investors are concerned that it’s just a matter of time for liquidity stress to spread to larger and healthier developers,” said Daniel Fan, an analyst at Bloomberg Intelligence. “If the offshore refinancing channel remains shut, the continued repaying of debt with their own cash is not a sustainable strategy and will eventually hurt cash flow.”
Heavy debt maturities facing developers in the third quarter are also weighing on investor sentiment, Fan said. High-yield builders need to repay a combined $3.7 billion of offshore bonds and $6.1 billion worth of domestic notes between July and September, excluding issuers that have already defaulted or extended debt, according to a recent BI report.
Dollar bonds from Country Garden Holdings Co., China’s largest builder by contracted sales, and CIFI Holdings Group Inc. have lost nearly 40% this month through Tuesday, according to Bloomberg-compiled data. That as the sector’s debt selloff has expanded to firms once deemed safe from cash crunches.
The credit market’s weakness has coincided with rising stress in China’s housing market, after hundreds of contractors to the property industry reportedly complained they can no longer afford to pay their bills because developers still owe them money. One group of small businesses and suppliers circulated a letter online saying they will stop repaying debts after China Evergrande Group’s cash squeeze left them out of pocket.
The crisis comes at an inconvenient time for President Xi Jinping, who is expected to secure a third term in office at a key Communist Party meeting later this year. He is widely thought to be placing a premium on social stability ahead of the gathering and years ago started saying that homes are not for speculation but rather to be lived in, a mantra government officials regularly repeat.
The surprise revolt by middle-class homeowners watching their wealth being eroded is further complicating government efforts to strike a balance between cutting debt-fueled financial risk and reviving economic growth.
There are few signs that the severe liquidity squeeze affecting China’s weakest developers and causing record amounts of offshore-bond defaults will end anytime soon.
Policymakers have refrained from taking more potent steps such as aggressive monetary easing. For one, Chinese banks held their main lending rates steady again this month, a sign that authorities’ policy scope is confined by inflationary pressures.
The country’s leaders have instead been relying more on administrative measures to contain the damage. Financial regulators have urged banks to boost lending to builders to help finish projects, and officials are even considering giving some homebuyers a grace period on mortgage payments. One bank after another also has assured investors that risks are controllable and their exposure to the delayed projects is small.
So far Chinese banks have disclosed only 2.1 billion yuan ($311 million) of credit at risk from the mortgage boycott, though firms such as Jefferies Financial Group Inc. have estimated at least 388 billion yuan could be impacted. Overall, lenders sit on 38 trillion yuan of outstanding residential mortgages and 13 trillion yuan of loans to the country’s beleaguered developers.
Still, some observers see the fallout remaining in check.
“We maintain our view that the situation is not triggering systematic crisis or social stability issues yet,” said Zerlina Zeng, a senior analyst at CreditSights. “The scale of the reported mortgage and supplier loan boycott is still small compared to outstanding loan balances.”
She expects China to coordinate with banks, developers and state-run entities to restart stalled projects soon, with non-viable ones likely converted into social housing or urban renewal projects.