Analysis: China's property crackdown stalks credit markets

Bank of Jinzhou Co

26/08/2021 09:48

* Bad loans and developer defaults jump
    * China junk debt market sinking as U.S./Europe rally
    * Authorities want to wean economy from real estate -
strategist

    By Samuel Shen and Tom Westbrook
    SHANGHAI/SINGAPORE, Aug 26 (Reuters) - China's push to wean
property developers from excessive borrowing is spilling over
into loan losses at banks and pain in credit markets as
cash-strapped builders fall into distress, raising the risk of
fallout rippling across the economy.
    Debt and land-buying curbs and hundreds of new rules are
hitting developers far harder than they had expected, setting
off a scramble to sell assets as well as a steady drumbeat of
bankruptcies, defaults and cut-price takeovers.
    The regulatory push is the latest in years of efforts to
reduce risks in the real estate sector and, as with crackdowns
roiling the internet and education sectors, has not been
formally announced.    
    Yet, unlike previous iterations, it is driving a heightened
level of discomfort in markets as investors grapple with
authorities' persistence and with what is at stake for a sector
that currently comprises about a quarter of the Chinese economy.
    "The government is engineering a gradual decoupling between
China's economy and the real estate sector by reducing its
importance," said Xing Zhaopeng, senior China strategist at ANZ.
    Capital is being reallocated to technology or other targeted
areas, he said. What that looks like, so far, is a series of
high profile property-sector defaults this year and a sharp
deterioration in bond markets' faith in China's corporate
borrowers. 
    The premium over risk-free yields that investors demand for
China's developer-dominated high-yield debt  .MERACYC  has
surged 300 basis points in three months, whereas European
 .MERHE00  and U.S. premiums  .MERH0A0  have fallen. The
divergence is the widest on record.
    Bank loans are also turning bad where exposure is high, with
bad debts in the property sector tripling for Shenzhen's Ping An
Bank  000001.SZ  in the first half and rising 53.5% at the Bank
of Jinzhou  0416.HK  and 25.8% at Bank of Shanghai  601229.SS .
    Court records show about 220 real estate companies filed for
bankruptcy so far this year, tracking at a slightly lower rate
than the 390 filings during 2020.
    "Markets should be prepared for what could be a much
worse-than-expected growth slowdown, more loan and bond
defaults, and potential stock market turmoil," Nomura's chief
China economist Ting Lu wrote in a report published this week.
    "In a sense, this could be China's Volcker moment,
considering Beijing's unprecedented determination to tighten
property sector policy and tame property prices," he said, a
reference to former U.S. Fed chair Paul Volcker whose late 1970s
and early 1980s rate hikes triggered recession but cooled
inflation.
    
    UNCOMFORTABLY NUMB
    For now, the deepest damage is first being inflicted on
developers confronting the end of an era of debt-fuelled growth.
    China's no.2 and the most indebted developer, Evergrande
Group  3333.HK , issued a profit warning on Wednesday, citing
declining prices and rising expenses in the first six months.
Scores of smaller developers are faring even worse as the wheels
come off from money-go-round models.
    Fujian province's Fusheng Group, for example, which in 2018
boasted how it would buy land, begin building within three
months, make sales within six months and recover its investment
within a year is now ailing and in the process of being bailed
out by bigger rival Shimao  0813.HK .
    "There'll be no more big profits for developers," said an
executive at one mid-sized developer in eastern China, who
requested anonymity because he is not authorised to speak
publicly. "We've grown to feel numb about all this tightening."
    In the broader market - where property is a favourite asset
- national price growth has hit a six month trough and realtors
say transaction volumes have plunged as rising mortgage rates
and restrictions on buyers choke the market.  urn:newsml:reuters.com:*:nL1N2PN02S
    "These measures are the most draconian I've ever seen," said
Steven Huang, a veteran agent in Shanghai at property broker
Lianjia.com.
    
    EVERGRANDE
    Another focal point for contagion risk is the financial
system, where fears centre on exposure to Evergrande, an emblem
of the boom which is now scrambling to meet what S&P Global
estimates is $37 billion in debts due in the next year alone.
    Executives were summoned by regulators last week and told to
put their house in order to preserve stability - a move markets
weren't sure whether to interpret as a hint at support or a
warning of what is to come.  urn:newsml:reuters.com:*:nL1N2PR017
    To be sure, bad debts at commercial banks are steady and low
with non-performing loans at 1.76% last quarter, according to
the banking regulator, and some investors do not think a
U.S.-style short-term-pain-long-term-gain wipeout is a likely
event.
    "That whole idea is not the style of how China's government
behaves," said Tiansi Wang, a senior credit analyst at Dutch
fund manager Robeco in Hong Kong. But a slower-burn shakeout may
keep credit markets on edge for some time, investors said.
    "Stability remains a priority, but not the only thing
anymore," said Wang. Meanwhile, Evergrande debt is driving the
market and its bonds maturing in March have tumbled to trade
around 50 cents on the dollar  VG158043114= , indicating growing
concern the developer will be unable to pay.
    "I think the fact that the policymakers are letting market
forces drive the pricing of risk for these capital structures
suggests that the policymakers are comfortable with where this
is going," said Salman Niaz head of Asian credit at Goldman
Sachs Asset Management in Singapore.
    "(It) is creating some volatility in the short term but is
positive for systematic stability in the long run."

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China's high-yield debt market is under pressure    https://tmsnrt.rs/3BbJS4u
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 (Reporting by Samuel Shen in Shanghai and Tom Westbrook in
Singapore; additional reporting by Clare Jim in Hong Kong;
writing by Tom Westbrook
Editing by Vidya Ranganathan & Shri Navaratnam)
 ((tom.westbrook@tr.com; +65 6973 8284;))