China’s real estate market in the doldrums

On Tuesday, for a second day in a row, shares and bonds in China Evergrande, Beijing’s most indebted developer, plunged downwards following the suspension of sales of its two real estate projects by local authorities, which highlighted worries over its financial health.

The company’s Hong Kong-listed shares fell by more than 13% to its four-year low, following a plunge by 16% on Monday; the company’s bonds also dived, in onshore and offshore markets.

Local regulators in the Chinese city of Shaoyang, have ordered a sales halt for two Evergrande residential projects, citing misappropriation of funds, said a government notice published late on Monday.

The suspension deepens worries that Evergrande, which owes roughly $90 billion by June, will struggle to service its debts. Compounding its woes, a Chinese court has also frozen one of its bank accounts at the request of China Guangfa Bank Co, a creditor.

“Evergrande’s external financing is restricted, so its debt repayment relies heavily on property sales,” wrote Zhang Xu, an Everbright Securities analyst in a report on Tuesday. The report also notes that revenue generation continues to be a challenge for Evergrande, whose real estate projects for sale are mostly concentrated in China’s third- and fourth-tier cities.

On Tuesday, with the Chinese central bank keeping its benchmark lending rate unchanged, pessimism continued to spill into the broader property market, dashing hopes for a cut after a surprise lowering of bank reserve requirements last week.

China’s CSI300 real estate index also fell by 1.7% on Tuesday morning, following Monday’s 1.9% slump.

According to Wonnie Chu, managing director at GaoTeng Global Asset Management, surging bond yields for a developer risked creating a “vicious cycle” that could damage refinancing capabilities.

Chinese developers are struggling to cope with slowing sales and rising financing costs with authorities in Beijing restricting property loans and imposing policies under its “three red lines” guidance to force deleveraging in the sector.

“The housing situation in China is quite political because it becomes an affordability issue and a matter of social cohesion,” said Carlos Casanova, senior economist for Asia at Union Bancaire Privee. Since the government will continue to keep curbs in place, “so we are going to see more defaults”.

China Fortune Land Development Co, which defaulted on its loan repayment earlier this year said on Tuesday, its overdue debts had increased to 73.2 billion yuan.

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