Yesterday Fantasia Holdings Group became the latest property developer to fail to repay a maturing bond.
That, plus ratings down grades, put Chinese junk dollar bonds on the edge of their biggest selloff in at least eight years, according to Bloomberg calculations, and pushed yields near a decade high.
Fantasia’s missed payment “provides a clear sign that despite piecemeal bailouts of select Evergrande assets, property market stresses remain elevated,” Craig Botham, chief China economist at Pantheon Macroeconomics, told Bloomberg “The rot is unlikely to stop here.”
Traders and investors are clearly worried that other real estate companies will be sucked into the debt crisis. Sunac China Holdings fell 10.06% in Hong Kong. China Aoyuan Group was down 10.73%. (That market has a 10% daily limit on price moves.) A Bloomberg index of Chinese real estate stocks is trading at less than 0.4 times book value.
So far the government has maintained rules that force indebted developers to reduce leverage rather than arranging to bailout property developers.
That stance has made refinancing maturing debt increasingly difficult with junk-rated real estate companies selling the smallest amount of debt in the third quarter since 2017. At the sale time sales of homes have plunged by 30% year over year in September. The combination has resulted in a severe cash crunch in the sector.
The challenge to government regulators who want to hold the line on limits to leverage is likely to get more intense as October moves along. Fifteen of the country’s most stressed property developers will have $2.1 billion in bond payments–of interest mostly–due this month, according to calculations by Citigroup. That debt bill will more than double in January as principal payments come due.
What we’re seeing right now is the unwinding of some of the cross-investments that characterize not just the real estate sector but also other industries. Last week Evergrande agreed to sell a 20% stake in Shengjing Bank to the local government in order to ease its liquidity crisis.