Stocks and bonds in China’s real estate industry fell to around eight-month lows on Monday as repayment concerns at two of the country’s biggest developers deepened a crisis of confidence in the sector.
Cash shortages at giants Country Garden and Dalian Wanda show funding issues have reached what many hoped were the largest and safest players in a business that once contributed a quarter of China’s gross domestic product and is all but frozen.
Doubts are growing any official support will be forthcoming, and investors do not expect any aid to be aimed at shareholders.
Country Garden shares fell by 8.7% to HK$1.26, an eight-month low and shares in its services arm tumbled 17.9% to HK$7.4. Country Garden dollar bonds fell to less than a fifth of their face value.
Shares at rival Longfor dropped 8.5%, while an asset sale at Wanda failed to revive bond prices as investors waited on whether the cash actually reaches bondholders’ pockets.
“As market sales continue to weaken and policy expectations continue to fall short, it will be difficult for real estate developers to repay bonds by their own operations,” said Yao Yu, founder of credit analysis firm Ratingdog.
“Investors must become more and more pessimistic.”
Property development has ground to a halt in China as a government crackdown on debts and crumbling public confidence have left builders unable to sell apartments or refinance their dues.
Guidelines promoting urban redevelopment published late on Friday were seen as small scale, leaving investors hoping for more from a Politburo meeting expected this week. That big names were struggling, however, highlighted the depth of the problems.
An index of mainland developers fell 6.4% on Monday and recorded its worst session of 2023.
“Everything is falling,” said a Hong Kong debt fund manager, who spoke on condition of anonymity.
“The major thing that we see now is onshore-traded Country Garden bonds going down,” he said. “That is the largest one. People get scared if that one cannot survive.”
DOWNGRADES AND DEFAULTS
Country Garden is a giant with thousands of projects in nearly 300 Chinese cities. Its move to refinance a 2019 loan facility surprised and unnerved investors, and follows ratings downgrades and new defaults elsewhere.
Li Changjiang, the president of Country Garden Services, sold 3.2 million shares of the company last week, reducing his stake to 0.11% from 0.21%.
“Although this is not his first time selling shares of the company, the number of shares sold was one of the largest,” said J.P.Morgan analysts in a note.
J.P.Morgan downgraded Country Garden Holdings from neutral to underweight, and cut its price target to HK$0.9 from HK$2.3. The bank also reduced the price target of Country Garden Services Holdings to HK$6.7 from HK$22.
Country Garden’s onshore-traded bonds dropped to less than half of their face value on Monday and dollar bonds due in 2025 and 2031 fell below 20 cents on the dollar.
Wanda, China’s largest commercial developer, was also seeking cash for one of its subsidiaries to make an already-late coupon payment due before the end of a grace period on July 30.
It sold part of another subsidiary to streaming company China Ruyi for $320 million, which a source familiar with the matter said would help it to repay a separate $400 million bond.
State-backed developer Greenland Holdings has missed repayments this month, while Sino-Ocean Group proposed extended terms for a 2 billion yuan ($278 million) bond due on Aug. 2.
The new problems have squashed a nascent rally after China lifted COVID-19 controls and opened its borders ending years of movement restrictions.
Restructuring plans at Evergrande, which was the poster-child of the sector’s 2021 plunge into funding stress, are before the courts in Hong Kong and the Cayman Islands, while property sales are in a new slowdown.
“Distressed Chinese property developers’ bond restructurings can buy them some room,” Fitch Ratings said in a report on Monday. “But most will continue to face repayment difficulties if home sales do not recover for a sustained period.”
