The latest moves have dragged even more junk dollar notes from Chinese property companies into distress, with 94% now trading below 70 cents on the dollar. That market was until just years ago one of the most lucrative bond trades globally. But it all began to unravel after a nationwide clampdown started in 2020 on leverage and real estate speculation, and has snowballed into record defaults by developers including China Evergrande Group.
The contagion is even reaching property giants that still have investment-grade ratings including China Vanke Co., the nation’s second biggest developer by sales. Its note due 2027, which was trading above 80 cents just a month ago, fell 4 cents Tuesday in the worst two-day drop ever to an all time-low of 40.3 cents.
“Now with some presumably better-off developers getting into trouble, people start to worry about a contagion to non-state developers,” said Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities. “It’s not just a confidence issue, and developers’ liquidity conditions are only getting tighter in the future given sales have been slower than expected.”
As refinancing costs surge in global debt markets, China’s property sector has at least $292 billion of onshore and offshore borrowings coming due through the end of 2023, raising the specter of even worse payment pressure to come. There’s $53.7 billion borrowings still due the rest of 2022, followed by $72.3 billion of maturities in the first quarter of next year.
“We have seen no improvement in terms of the funding for private-sector developers,” Bank of America Corp. economist Helen Qiao said on Bloomberg Television Tuesday. “The stimulus was not strong enough to get them out of the current liquidity trap, and therefore how exactly they can really survive raises many questions.”
It is reasonable to expect that most of the property debt issued through Hong Kong in US Dollars will be defaulted on. Any stimulative measures designed to prop up the property market and local developers will be aimed exclusively at domestic investors. Foreign investors are way down the line in terms of priorities for China.
Talk of workers deserting Foxconn’s iPhone factory in droves as a COVID lockdown goes into the place were trending in the media over the last 48 hours. Together, with the worries about property debt and the downward acceleration in Chinese stock markets, the stage was set for some short covering.
An anonymous social media post saying a loosening of COVID restrictions is imminent was a catalyst for a rebound in commodities, equities and luxury goods companies this morning but enthusiasm faded as the day progressed.
Let’s think about the rationale for removing COVID-zero controls. It would boost demand in the economy and everywhere else for that matter. However, around 10% of China’s population have diabetes and 35% have pre-diabetes. Those are 2013 figures so the incidence is likely to be higher now. Since COVID is riskiest for people who are old, overweight and with pre-existing conditions that puts a large proportion of the population in the high risk category.
It should also be highlighted that the COVID-zero program is no longer working. The latest strains are much more transmissible than the original versions. Given China’s underdeveloped hospital network, caring for large numbers of sick people is going to be a challenge to say the least. Quarantining can only slow down the pace of the spread it cannot be reversed. In a tightly controlled economy like China, paranoia at the thought of leaving the country exposed to an external threat at the point of maximum weakness is enough to sustain the quarantine program even if public disquiet is rising.
Instead I suspect we will see more overt efforts to support domestic asset prices to contain the potential for protests. That should help to support the stock market in the short term.