Andy Suen, portfolio manager and head of Asia ex-Japan credit research at PineBridge Investments in Hong Kong, said policy support for the sector “has not been sufficient in terms of stabilising the property market, if you look at the sales numbers”. Official figures show home sales in China fell nearly 30% in the first half of the year to about Rmb6.6tn. A year from now, we could be facing an even worse situation.” “This time last year, no one expected what we’re seeing today with mortgage boycotts and construction suspensions. “The whole situation is increasingly out of control,” said Rosealea Yao, a property market analyst at Gavekal Dragonomics, a consultancy. “In six months that gap could expand significantly if you don’t backstop the downward spiral,” he added. Xing said a Beijing-led bailout to address an estimated financing gap of up to Rmb1tn ($146bn) for unfinished housing projects would take “very strong political capital” and that the problem would become worse the longer policymakers waited to step in. “A more centralised bailout is probably the necessary solution here,” said Robin Xing, chief China economist at Morgan Stanley, of the looming crunch in the country’s housing market. That triggered a crisis of confidence that has throttled sales revenues and thrown large swaths of the industry into a liquidity crunch. Investors had initially hoped the worst of the pressure would be limited to the most debt-laden groups, such as Evergrande, which had grown more reliant on presales of unfinished housing in recent years in response to a crackdown on excess leverage in the sector.īut stalled construction on projects at Evergrande and a handful of high-risk developers stoked broader fears among the general public that other groups might go bust before finishing pre-sold homes. “The odds of a lot of these guys ever repaying is anyone’s guess.” “There’s a good reason these bonds are trading at distressed levels,” said the banker, who is head of debt syndicate for Asia at a major European lender. Companies often seek to roll over borrowings into newly issued debt to extend these maturities, but ructions in the market have made this nearly impossible for most issuers. The companies have faced particular strain due to maturity walls, in which several developers are expected to pay back principal, or the amount they initially borrowed, at once. Taken in aggregate, investors have priced in almost $130bn of losses on the more than $200bn in outstanding dollar bond repayments owed by Chinese real estate groups, reflecting a discount of nearly two-thirds to the market’s presumed value if all repayments were made successfully.Ĭhina’s real estate groups have missed payments on a record $31.4bn worth of dollar bonds in 2022. A bond of the same size from Shanghai-based Shimao maturing in just over a year is priced just below $0.10 on the dollar, indicating a potential $268mn loss. One bond maturing on September 7 issued by Kaisa Group, one of the first in the sector to miss a dollar payment late last year, is priced at $0.09 on the dollar, implying a loss of about $272mn on principal of $300mn. Many developer dollar bonds are now priced at a level that implies a very high risk of default. “We still believe defaults will continue through the rest of 2022, particularly for developers with large offshore debt maturities and weak sales.” “With the industry headwinds and negative news, it’s very clear many more developers’ offshore bond prices have fallen sharply since last year,” said Cedric Lai, a senior credit analyst at Moody’s Investors Service. But analysts said policymakers’ refusal to launch a sweeping bailout may only add to the ultimate cost of rescuing the industry and could worsen the fallout for global markets and trade as Chinese growth grinds slower. Beijing’s response has been limited to incremental measures, including a cut this week to the mortgage lending rate.
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