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Chinese officials seek to reassure on property debt crisis, some bonds rebound

By Reuters

By Clare Jim and Andrew Galbraith

HONGKONG/SHANGHAI – More Chinese officials sought to reassure investors and homeowners on Wednesday over a debt crisis afflicting the country’s property sector, saying risks were controllable and excessive credit tightening by banks was being corrected.

Worries that a cash crunch at China Evergrande Group, the world’s most indebted developer, could cause broader economic contagion have roiled global markets in recent weeks and hit high-yield bonds issued by other Chinese property developers.

In comments reported by state media Xinhua, Vice Premier Liu He told the Financial Street Forum in Beijing that overall risks in the property market are controllable, and the property market is on track for healthy development.

Meanwhile, the chairman of China’s securities regulator, Yi Huiman, said at the same forum that authorities will curb excessive financing, adding the country will properly handle default risks in bond market.

“(We need) to improve the effectiveness of the constraint mechanism on debt financing, to avoid excessive financing through ‘high leverage’,” Yi said.

Chinese property developers have total outstanding debt of 33.5 trillion yuan ($5.24 trillion), according to Nomura, equivalent to roughly a third of the country’s gross domestic product (GDP).

Pan Gongsheng, head of China’s foreign exchange regulator, said excessive tightening by financial institutions and markets on the property sector is being gradually corrected, and financing activities are normalising, financial magazine Yicai reported.

Those comments followed a speech by People’s Bank of China (PBOC) Governor Yi Gang, who said on Sunday https://www.reuters.com/world/china/china-faces-challenges-mismanagement-certain-firms-says-pboc-head-2021-10-17 that the world’s second-largest economy is “doing well” but faces challenges such as default risks for certain firms due to mismanagement.”

China will fully respect and protect the legal rights of Evergrande Group’s creditors and asset owners in line with repayment priorities laid out by the law, Yi said, according to a transcript released by the PBOC on Wednesday.

Yi also said regulators should do their best to avoid risks from Evergrande spilling over into other property developers and the broader financial sector.

Evergrande is scrambling to raise funds to pay its many lenders and suppliers, amid expectations it is about to formally default on one of its international bonds. The company shelved plans to sell a majority stake in its property services unit, sources said.

It has paid an onshore coupon due Tuesday, but a dollar bond due March 23, 2022 will officially be in default if the company does not make good after a 30-day grace period for a missed coupon payment that had been due on Sept. 23.

Official reassurances and coupon payments from other major developers have helped to support the wider offshore bond market in recent days.

An index of China high-yield debt, which is dominated by property developer issuers, saw spreads continue to tighten on Tuesday evening, U.S. time, after hitting record levels last week.

But a continued slump in bonds issued by Kaisa Group Holdings, which was hit by a ratings cut on Tuesday, indicated that investors’ concerns continue to linger. Kaisa’s 11.5% January 2023 bond led the losses, falling nearly 14% to around 37 cents.

“I feel the market is still seeking the bottom and is sensitive,” said a portfolio manager who asked not to be identified as he is unauthorised to speak with media.

Tens of thousands of Chinese developers had borrowed heavily to build homes during a surge in the property market between 2016 and 2018. But they are now facing a liquidity crunch amid tighter regulations on fresh borrowing, leaving many projects incomplete.

New construction starts slumped for a sixth straight month in September and home prices are falling in parts of the country.

“Pressure to relieve the financing strains of indebted borrowers will intensify as economic activity weakens,” Capital Economics said in a research note on Wednesday, predicting the PBOC will start cutting policy rates before year-end and into 2022.

($1 = 6.3946 Chinese yuan renminbi)