Caixin
Mar 20, 2020 09:30 PM
FINANCE

Chinese Property Stocks, Bonds Hammered as Outlook Spooks Markets

The slump in investor appetite for risky assets and the decline in market liquidity could present significant headwinds for Chinese property developers as they try to refinance their bonds. Photo: VCG
The slump in investor appetite for risky assets and the decline in market liquidity could present significant headwinds for Chinese property developers as they try to refinance their bonds. Photo: VCG
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The stocks and bonds of Chinese property developers have been hit hard by the turbulence in capital markets triggered by the coronavirus outbreak as investors shun the sector amid concerns over profitability and sales.

Builders listed on the Chinese mainland and in Hong Kong have fallen sharply over the past two weeks. The Shenzhen-listed shares of China Vanke Co. Ltd., one of the biggest developers by sales, have dropped 15.1% since the close of business on March 11, while in Hong Kong they’ve slumped 16.4%. Hong Kong-listed China Evergrande Group has plunged 27.3% over the same period.

Vanke disclosed on Tuesday that sales sank about 51 billion yuan in February and the first half of March compared with the same period last year and its chairman Yu Liang warned that “survival is a real issue now.”

Property developers’ bonds traded on overseas markets, most of which were issued at relatively high interest rates to reflect concerns about the risk of default, have also slumped as investors have fled to safety and dumped high-risk investments. Property bonds have been among the worst hit of the U.S. dollar-denominated bonds issued by Chinese companies as capital has flowed out of emerging markets and high-yield exchange-traded funds. On Wednesday, the yield on several bonds denominated in U.S. dollar issued by Evergrande Group soared to about 20%.

“Chinese enterprises’ U.S. dollar bonds are already lying on the floor,” a bond trader said.

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Yields on U.S. dollar bonds issued by Chinese real-estate companies have surged over the past two weeks. Analysts at UBS Wealth Management wrote in a note on Thursday that the yield on BB-rated bonds had climbed 177 basis points to 8.1% while that on B-rated bonds has jumped 397 basis points to 13%, which is higher than their historical averages. They expect the high yields to persist in the 8% to 15% range for the next three to six months.

As of Tuesday, there were 86 U.S. dollar-denominated bonds issued by Chinese companies with yields trading above 15% and 53 belonged to real-estate developers, according to data compiled by Bloomberg.

“Over the past several weeks, one-year bonds have been heavily hit as mutual funds sold them to raise cash and retail investors sold them to meet margin calls or to buffer equity positions,” UBS analysts wrote in the report.

Several bond traders told Caixin that although bond yields have risen sharply, trading volumes have been relatively small. “Now the main problem in the U.S. dollar bond market is liquidity,” one trader told Caixin. “As there are not many buyers in the market, so even though bond prices have fallen a lot and yields have jumped, there is very little trading.”

More headwinds

The slump in investor appetite for risky assets and the decline in market liquidity could present significant headwinds for Chinese property developers as they try to refinance their bonds. The first repayment wave is starting and if companies can’t find buyers they could face a squeeze on liquidity.

Some $4.2 billion of bonds issued by mainland property developers were due to mature in March, accounting for 13.5% of the total for 2020, according to a report by China International Capital Corp. (CICC). In April, the figure will drop to $1.3 billion, it said.

Developers could also be hit by the strong dollar if they need to repay the debt using yuan-denominated funds.

“Over the past few years domestic real estate developers have issued a lot of overseas U.S. dollar bonds,” Jiang Huawei, an analyst at Guojin Securities, told Caixin. “As the U.S. dollar index has risen recently, a strong dollar is a major negative factor for them.”

Developers rely heavily on sales to fund their operations and repay debt but the coronavirus outbreak put the market into the deep freeze in January and February as the government ordered sales office to close, shutting down a key source of funding. In February, 19 out of the 70 cities monitored by the National Bureau of Statistics didn’t record a single sale of new homes, and 24 cities saw no transactions for second-hand homes.

But despite the potential financial disruption, policymakers are unlikely to unveil a major stimulus for the property sector, CICC analysts wrote in the report, pointing out that various regulators have already ruled out real estate as a short-term stimulus to shore up the economy. However, some local governments may offer help for some developers to raise funds, they said.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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