Beijing’s property tax plans and fresh signs of weakening in China’s housing market knocked real estate shares in the country on Monday despite the central bank’s efforts to calm nerves over China Evergrande Group’s (3333.HK) debt woes.
Bonds in the sector, however, enjoyed a day of healthy gains following upbeat central bank comments and after developer Kaisa Group (1638.HK) said it had paid the coupon on one of its dollar bonds and planned to make a payment on a second this week.
The CSI300 Real Estate Index (.CSI000952), which tracks the stocks of China’s biggest developers, fell 2.6% with China Vanke (000002.SZ) and Poly Development (600048.SS) dropping more than 3%. Real estate shares have slumped 22% this year.
Hong Kong property shares fared better though, with an index tracking mainland firms (.HSMPI) ending the day 0.8% up.
China’s President Xi Jinping called on Friday for the nation to “vigorously and steadily advance” legislation for a property tax, which could curb rampant speculation, according to an essay in the ruling Communist Party journal Qiushi.
Rocky Fan, economist at Sealand Securities, said property tax expectations were negative for real estate shares because “people would balk at buying properties and take a wait-and-see attitude, hurting developers’ revenues”.
Global financial markets have been rocked by fears of contagion over a liquidity crisis at Evergrande, which has more than $300 billion in liabilities.
On Sunday, the People’s Bank of China (PBOC) Governor Yi Gang said the economy faced challenges such as default risks for certain firms due to “mismanagement”, and that authorities were keeping a close eye “so they do not become systematic risks”.
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Yi’s comments followed another PBOC official speaking on Friday, who said the spillover effect of Evergrande’s debt problems on the banking system were controllable and individual financial institutions’ risk exposures were not big.
China property debt markets reacted favourably to the PBOC’s comments on Friday, and extended their rally on Monday.
“You have had some supportive comments from the PBOC,” said Colm d’Rosario, senior portfolio manager at Amundi.
“The government has been in an active process of how to manage this situation,” he said, also pointing to reports of messages to speed up mortgage approvals.
Bonds also got a boost after Kaisa told Reuters it had paid $39.4 million worth of coupon for a dollar bond due on Oct. 16, and planned to transfer funds for a coupon worth $35.85 million due Oct. 22 into bondholders accounts on Thursday.
A number of Kaisa Group’s bonds due in the next three years added about 5 cents in the dollar with the 2024 issue trading above 50 cents in the dollar for the first time in 10 days , MarketAxess data showed.
Some bonds issued by Yuzhou Group (1628.HK), jumped 6 cents in the dollar while those of Zhenro Properties (6158.HK), added 4 cents.
But other analysts were less upbeat.
“The PBOC is downplaying the market impact of Evergrande’s default,” JPMorgan wrote in a research note, adding that the developer’s problems represented an industry-wide problem.
“Policymakers have the levers to contain the spillover risk; but if no policy action is taken, the risk of further deterioration should not be underestimated, which may lead to investment slowdown, weaker consumption, fiscal problems for local governments and broader financial sector pressure.”
Data on Monday confirmed expectations of a slowdown in economic growth. China’s economy expanded 4.9% in the third quarter, slower than expected, while industrial output also came in short of expectations.
New construction starts in September slumped for a sixth straight month, the longest spate of monthly declines since 2015, according to Reuters calculations based on data released by the National Bureau of Statistics.
Bond markets seemed to be broadly unfazed by another spate of ratings downgrades.
Moody’s downgraded the corporate family rating (CFR) of Kaisa on Monday to “B2” from “B1” and placed its ratings on review for further downgrades, citing weakening liquidity and rising refinancing risk expectations over the next six to 12 months amid tight funding conditions and large debt maturities.
Moody’s also downgraded the ratings of Greenland Holdings and Guangzhou R&F, among others.
Sinic Holdings (2103.HK), which has a $246 million bond maturing on Monday, said last week it would likely default. Fantasia Holdings (1777.HK), which missed a payment earlier this month, has another $21.44 million coupon due on Monday.