The real estate sector in China experienced a crisis of confidence on Monday as stocks and bonds dropped to about eight-month lows amid worries about a cash shortage at two of the nation’s largest developers, Country Garden and Dalian Wanda.

The downturn shows that the issues that first surfaced with China Evergrande two years ago have now spread to what many had believed to be the biggest and safest firms in a sector that is vital to China’s economy.

The government would “adjust and optimise property policies at an appropriate time,” according to state-run Chinese media on Monday, but scepticism persists, particularly following six months of intense stock and bond market selling.

The shares of Country Garden, China’s largest homebuilder by sales volume, fell by 8.7% during the most recent downturn, and those of its services subsidiary fell by over 18%.

Many of its bonds experienced the largest drop in price on overseas markets in more than a year, trading for just 10% to 15% of their original face value, raising concerns about a default a la Evergrande.

While an asset sale at Wanda failed to boost its bond prices as investors waited to see whether the cash would reach bondholders, shares of rival Longfor (0960.HK) fell 8.5%.

“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.

The government’s crackdown on debtors and the public’s waning confidence have prevented builders from selling apartments or refinancing their obligations, which has put a stop to property growth in China.

Investors were unimpressed by “urban redevelopment” guidelines that were released late on Friday, but on Monday, during a Politburo meeting that was held a few days earlier than most China watchers had anticipated, there were signals of a more major shift.

Morgan Stanley analysts drew attention to the Politburo readout’s omission of the words “property is for living not for speculation” and stated that it was “necessary to adapt” and that this was a problem.

“China should optimise its property policy”.

“This is very important, in our view,” Morgan Stanley’s analysts said. “Investors should recall that the early stage of Covid easing was labelled as ‘optimised’ policy, which led to a complete change of the policy later.”

An index of mainland developers (.HSMPI) experienced its worst session of 2023 on Monday before the Politburo readout, falling 6.4%.

“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.”

With hundreds of projects in around 300 Chinese locations, Country Garden is a massive company. Investors were shocked and alarmed by a decision to refinance a 2019 borrowing facility last week, which came after a barrage of ratings downgrades for the company.

The president of Country Garden Services, Li Changjiang, sold 3.2 million shares of the business last week, bringing his ownership down from 0.21% to 0.11%.

“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 in which they downgraded Country Garden Holdings to “underweight”.

They also reduced Country Garden Services Holdings’ price target from HK$22 to HK$6.7 and its price target from HK$2.3 to HK$0.9.

“Country Garden’s (bond) maturities are still heavy,” they added, pointing out that the firm has nearly $4.9 billion (35 billion yuan) of bond payments to make over the next 6 months.

On Monday, Country Garden’s onshore-traded bonds lost up to a third of their value, falling to between 10 and 15 cents on the dollar, while its dollar-denominated bonds, frequently held by foreign investors, also decreased to less than half of their face value.

The biggest commercial developer in China, Wanda, also needed money to pay a subsidiary’s already-overdue coupon payment before a grace period ended on July 30.

In order to assist it pay off a separate $400 million bond, it sold a portion of another business to streaming company China Ruyi (0136.HK) for $320 million.

While Sino-Ocean Group has asked investors to extend the terms of one of its 2 billion yuan ($278 million) notes due on August 2, state-backed developer Greenland Holdings has skipped payments once more this month.

This year’s increased strain on the industry comes despite China’s continued weak home sales and the elimination of most of the COVID-19 era movement restrictions.

Courts in Hong Kong and the Cayman Islands are already hearing litigation involving Evergrande’s restructuring plans, which might determine how much money devastated creditors will ultimately be able to recover. Evergrande is the industry’s poster child for its 2021 crash.

“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.”

(Adapted from Reuters.com)

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