How bad are things going in the Chinese real estate market?

Government restrictions on borrowing in China’s real estate sector have helped trigger a spiral of declining home sales, rising corporate bond yields and loss of confidence among investors and potential home buyers. While the past few days have brought a modest improvement in sentiment, giant China Evergrande Group EGRNF -7.50%

and several smaller peers have already defaulted and losses may continue to mount. Here’s where the market stands as 2022 kicks off.

Sales have plummeted

Contract sales, or the value of new contracts that developers have signed with homebuyers, have fallen sharply in the final months of 2021, causing many real estate companies to miss their annual sales targets. According to figures from China Real Estate Information Corp., contract sales for the top 100 developers fell 9% for the whole of last year, reflecting lower prices and volumes. Official data shows that new housing starts by developers fell by more than 11% in 2021 and property investment fell in the latter part of the year.

Dollar bond defaults have skyrocketed

Chinese developers who collectively have tens of billions of dollars of international bonds outstanding have failed to repay investors as promised. Some missed interest or principal payments, while others prompted bondholders to swap their debt for new, less attractive securities. This process, known as a distressed debt swap, is often considered equivalent to default by ratings companies and investors.

The bond market separates the weak from the strong

Investors dumped bonds from financially weaker developers like Evergrande, indicating deep skepticism that those debts would be paid off in full. The sale fueled a vicious circle, virtually shutting down the market for further bond sales and making it more likely that many struggling developers will have to default on debt they cannot refinance.

Some more powerful developers with state support, like China Vanke Co.

, were relatively unscathed. But volatility has spread and large real estate groups with relatively high credit ratings that lack state backing, such as Shimao Group Holdings ltd.

, and more recently Country Garden Holdings Co.

, have also recently experienced significant fluctuations in the price of their bonds.

And real estate stocks crashed

Debt market malaise is in the news in part because Chinese real estate accounts for such a large share of the Asian junk bond market and because investors are eager to see how foreign bondholders are treated. . But the sudden slowdown also fueled a sell-off in the shares of many Hong Kong-listed Chinese developers.

On the bright side, home price declines look modest

Recent official statistics show that new home prices have started to fall, in their first decline since the start of 2015, although the decline moderated in December. Statistics from 70 major cities show that second-hand home prices are also falling. Some local governments have introduced measures to support prices, including extending subsidies and warning developers against offering deep discounts.

…And some lending data seems to be improving

Chinese authorities have softened some of their rhetoric on real estate, suggesting they are reluctant to overstate their attacks on what is a major driver of Chinese growth. The People’s Bank of China recently lowered some key interest rates, including a five-year lending rate that is commonly used as a benchmark for pricing mortgages, as part of a broader shift to ease the Politics. The central bank has started detailing monthly increases in mortgage lending – which totaled 401 billion yuan in November, or around $63 billion – apparently to reassure markets that supply and demand for home loans remain. healthy. Broader data on household credit tell a similar story.

Yet the pain is not over yet

Developers have a mountain of offshore debt to refinance in the first months of this year. While heavyweight Country Garden has recently been able to sell convertible bonds, selling new debt or convertible bonds won’t be an option for most companies. And regulators have also made it difficult for companies to redeploy cash that sits in individual projects, because most of that cash has been provided by homebuyers in the form of prepayments for unfinished units. Recent reports that China could make it easier for developers to access this cash have helped spur a modest rally in stock and bond prices, but some analysts and investors are skeptical of what difference this will make in practice.

For companies that cannot quickly find other sources of funding, such as selling assets or securing new loans or equity from wealthy majority shareholders, the next step could be either full default, or the constraint of bondholders to an exchange of debts.

Write to Quentin Webb at [email protected]

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