© Reuters. FILE PHOTO: Workers walk near the construction site of apartment buildings by real estate developer Country Garden in Kunming, Yunnan Province, China, September 17, 2019. REUTERS/Wong Campyeon/File Photo
Written by Jason Zeo and Tom Westbrook
SHANGHAI/SYDNEY (Reuters) – Shares and bonds in China’s real estate industry fell to their lowest in nearly eight months on Monday, as payment concerns at two of the country’s biggest property developers deepened confidence in the sector.
The cash crunch at giants Country Garden and Dalian Wanda shows that the funding problem has reached what many hoped would be the biggest and safest players in a company that once contributed a quarter of China’s GDP and is now on a standstill.
Doubts are growing that official support of any size is on the way, and investors don’t expect any help to target shareholders.
Country Garden shares fell 6% to an eight-month low and shares in its services arm fell 16%. The country’s dollar bonds have fallen to less than a fifth of their face value.
Shares in rival Longfor fell 10%, while an asset sale in Wanda failed to revive bond prices as investors waited to see if liquidity actually reached bondholders’ pockets.
“As market sales continue to weaken and policy expectations continue to deteriorate, it will be difficult for real estate developers to repay the bonds through their own operations,” said Yao Yu, founder of credit analysis firm RateDog.
“Investors should become more pessimistic.”
Real estate development has stalled in China as a government crackdown on debt and a collapse in public confidence has left builders unable to sell apartments or refinance their debts.
Guidelines promoting urban redevelopment published late Friday are seen as underwhelming, leaving investors hoping for more from the Politburo meeting expected this week. But those big names who were struggling highlighted the depth of the problems.
The mainland developer index fell 5.5% on Monday and was on track for its worst session of 2022.
“Everything is going backwards,” said a Hong Kong-based debt fund manager who spoke on condition of anonymity.
“The main thing we’re seeing now is a drop in Country Garden’s intra-country securities,” he said. “This is the biggest. People get scared if they can’t survive.”
NEW JITTERS
Country Garden is a giant with thousands of projects in nearly 300 Chinese cities. Its move to refinance a 2019 loan facility caught investors by surprise and unnerved them, and comes on the heels of credit downgrades and new defaults elsewhere.
Country Garden internally traded bonds fell to less than half their face value on Monday and dollar notes due in 2025 and 2031 fell less than 20 cents on the dollar.
Wanda, China’s largest commercial developer, was also scrambling to get cash for one of its subsidiaries to make an already overdue coupon payment due before the end of the grace period on July 30. It sold part of another subsidiary of live broadcaster China Ruyi for $320 million, which a source familiar with the matter said would help it pay off a separate $400 million bond.
State-backed developer Greenland Holdings defaulted on payments this month, while Sino-Ocean Group proposed expanded terms for a 2 billion yuan ($278 million) bond due Aug. 2.
New problems crushed a rally when China lifted control of COVID-19 and opened its borders after years of movement restrictions.
Restructuring plans for Evergrande, which was the poster child for the sector’s 2021 plunge into funding pressures, remain before the courts in Hong Kong and the Cayman Islands, while property sales are in the midst of a new slowdown.
“A bond restructuring of distressed Chinese real estate developers could buy them some space,” Fitch Ratings said in a report on Monday. “But most will continue to experience payment difficulties if home sales don’t recover for a long time.”
($1 = 7.1972 renminbi)