Chinese Developers' Rally Falters Amidst Limited Government Support
Chinese real estate developers faced setbacks in sustaining a recent rally in both credit and equity markets, indicating that investors remain cautious until the government takes more decisive steps to address the industry's challenges.
A Bloomberg index tracking Chinese property developer stocks declined by 3.3%, reversing an 8.6% surge on Wednesday. The surge was triggered by reports that authorities were exploring measures to aid China Vanke Co., a government-backed developer, in bridging a funding gap of approximately 50 billion yuan ($6.8 billion).
Developer bonds remained relatively flat on Thursday following gains the previous day, reflecting a recurring pattern in recent years. Government interventions to prevent real estate crises from spiraling have often led to short-lived market rallies.
While the Vanke proposal represented the most significant effort yet to address liquidity concerns of a single developer and instilled optimism in state-linked builders, it fell short of a full bailout. Senior credit analyst at Lucror Analytics Singapore, Leonard Law, opined that assisting Vanke, the weakest among state-backed developers, could provide a safety net for the others. However, he noted that private and defaulted builders were unlikely to receive similar reprieves due to their lesser systemic importance.
This segmentation is evident in market prices. Bonds from defaulted property firms are still valued at less than 10% of their face value, whereas some dollar bonds of Vanke, which is increasingly seen as unlikely to default this year given state support, have doubled in value over the past month. Vanke's share price has rallied 37% from its lows last month.
The resilience of China's housing market remains mixed. Despite various stimulus measures, the modest recovery in home sales has waned. Chinese banks have largely curtailed lending to real estate projects outside major cities, according to sources. However, there are signs of stabilization in certain areas, as premiums for land plots in key cities have surged in recent weeks, as reported by the Economic Information Daily.
Last week, the total value of distressed bonds and loans issued by Chinese firms declined at the fastest pace in almost nine months, according to Bloomberg data. This decline is partly attributed to the perception that the government may play a key role in Vanke's rescue.
Previous instances of state-owned developers facing financial difficulties, such as Sino-Ocean Group Holding and Shenzhen-backed China South City Holdings Ltd., did not result in defaults with state support. Timing may have been a crucial factor.
Huan Li, co-founder of Forest Capital Hong Kong Ltd., emphasized that a Vanke failure would symbolize the collapse of a major real estate entity, potentially undermining the central government's efforts to stabilize the sector.