Trusts fell 40% in September compared to the previous month, and global markets are bracing for the worst. The crisis is prompting Beijing to push for changes in the sector's business model.
Taken from Infobae
The potential collapse of Evergrande , one of China's largest real estate developers, and the problems of other firms facing imminent debt maturities appear to signal the end of one of the biggest real estate booms in history, while also raising concerns about the risk of contagion in the world's second largest economy.
The bill facing Chinese developers is staggering: more than $5 trillion in debt taken on when times were good , according to economists at Nomura Holdings quoted by the Wall Street Journal.
That debt is almost double what it was at the end of 2016 and more than the entire economic output of Japan , the world's third largest economy, last year.
Thus, global markets are preparing for a possible wave of defaults , with warning signs about the debt of approximately two-fifths of Chinese development companies that must repay bonds to international investors.
One sign of market unease was the slowdown in Chinese real estate trust products, which fell more than 40% in September compared to the previous month , the official Shanghai Securities News , as Evergrande's troubles further dampened investor appetite for the sector.
Newly launched real estate trust products raised 16.2 billion yuan ($2.5 billion) from investors in September, down 44.8% from the previous month , the newspaper said, citing data from investment advisor Usetrust. This follows a 24% decline in August and a 25% drop in July.
Evergrande drags the sector along
Evergrande's financial woes deepened in September , as the developer, which struggled with more than $300 billion in debt, fell behind on payments for wealth management products, business bills, and dollar bonds.
Chinese developers are already struggling amid government lending restrictions and rising bond issuance costs. A rapidly shrinking market for real estate trust products could further tighten financing channels for a sector suffering from slowing home sales.
Conversely, fiduciary products that channel money into capital markets experienced an increase in popularity and fundraising, Shanghai Securities News said.
Debt-laden real estate firms have also been hit by downgrades due to imminent defaults.
On Friday, the Shanghai Stock Exchange suspended trading of two bond issues from developer Fantasia after the group missed a deadline to pay a $206 million debt and its shares fell by more than 50%.
“The potential lack of transparency and clarity is making investors more nervous, and it will be very difficult for people to want to refinance any overdue debt in that particular sector,” Cliff Corso, chief investment officer at Advisors Asset Management, told Reuters
Silence from the authorities
Chinese regulators have not commented specifically on Evergrande during the past week of holidays in China.
Evergrande also remained silent on dollar-denominated debt payments. The fact that it is prioritizing domestic creditors has led offshore investors to question whether they will face significant losses at the end of the 30-day grace periods for last month's maturities.
This could be a prelude to larger-scale defaults.
“Market participants are wondering if this could be a precursor to voluntary defaults by other developers with healthy short-term liquidity positions but large, unsustainable long-term debt ,” Chang Wei Liang, credit and foreign exchange strategist at DBS Bank, said in a note.
Towards a change in business model
Even so, economists say that most Chinese developers remain relatively healthy .
The consensus is that Beijing has the firepower and tight control of the financial system necessary to avoid the so-called "Lehman moment ," referring to the collapse of the US bank that turned into a global financial crisis in 2008.
But many economists, investors, and analysts agree that even for healthy companies, the business model of Chinese developers, based on taking on debt to finance new buildings despite increasingly unfavorable demographics for new housing, is likely to change. Some developers may not survive the transition , according to several economists cited by the Wall Street Journal.
Many Chinese real estate developers rely heavily on "pre-sales ," where buyers pay upfront for apartments that are not yet finished. This practice facilitates the expansion of construction companies and their access to credit, but it can potentially leave buyers without completed apartments if the developers fail. The current crisis suggests this practice may be coming to an end.
Pre-sales and similar agreements were the largest source of financing for the sector this year through August, according to China's National Bureau of Statistics.
(REUTERS/Carlos Garcia Rawlins).
While Beijing has avoided clear public statements about its plans to deal with the most indebted developers, many economists believe that leaders have no choice but to keep the pressure on them.
Authorities appear determined to revamp a model fueled by debt and speculation as part of President Xi Jinping's broader efforts to defuse a crisis that could destabilize society ahead of important Communist Party meetings next year, where the leader is expected to extend his rule to a third term.
Beijing is concerned that after years of rapid increases in housing prices, some people may be unable to afford housing, which could fuel social unrest as inequality grows. The average apartment in Beijing or Shenzhen now costs more than 40 times the average family's annual disposable income , according to JP Morgan Asset Management.
Authorities have said they are concerned that the real estate market poses risks to the financial system. However, curbing developers' business models and limiting debt is almost certain to slow investment and trigger at least some recession in the real estate market , which is one of China's main drivers of growth.
