China property shares pummelled as Evergrande impact widens

Updated: October 14th, 2021 11:40 AM IST

#Chinese property firms suffer fresh downgrades amid #Evergrande crisis The rumbling crisis at #China Evergrande & other major firms drove debt market risk premiums on weaker Chinese firms to a record high on Wednesday & triggered credit rating downgrades

China property shares pummelled as Evergrande impact widens

Men ride bicycles past construction sites near the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China September 26, 2021. REUTERS/Aly Song

SHANGHAI/LONDON, Oct 13 (Reuters) - The rumbling crisis at China Evergrande Group (3333.HK) and other major homebuilders drove debt market risk premiums on weaker Chinese firms to a record high on Wednesday and triggered a fresh round of credit rating downgrades.

Evergrande, which has more than $300 billion in liabilities and 1,300 real estate projects in over 280 cities, missed a third round of interest payments on its international bonds this week, and other firms have also warned they could default.

Rating agency S&P Global delivered fresh downgrades to two of the sectors bigger firms, Greenland Holdings - which has built some of the worlds tallest residential towers - and E-house, and warned it could cut their ratings further.

The $5 trillion property sector accounts for around a quarter of the Chinese economy by some metrics. In the clearest sign yet that global investors worries are growing, the spread - or risk premium - on investment grade Chinese firms, which tend to have the most solid finances, jumped to its widest in more than two months.

The spread on the equivalent high-yield or junk-rated index (.MERACYC) that the likes of Evergrande are part of surged to a new all-time high of 2,337 basis points. That drove the yield - which reflects how much firms would have to pay to borrow - to an eyewatering 24%.

"We see a risk that a disorderly correction in the property market could cause sharp price declines, hitting the personal wealth of homeowners," Kim Eng Tan, a credit analyst at S&P Ratings, said in a report.

"Such an event could also contribute to large-scale losses by investors in wealth management products, and the contractors and service firms that support the developers."

While a 30-day grace period means the company has not technically defaulted, investors say they are expecting a long and drawn-out debt restructuring process.

Bonds issued by developers including Shanghai Shimao Co Ltd (600823.SS) China Aoyuan Group (3883.HK) and Country Garden Properties Group fell between 1.6% and 7.4%, according to exchange data, while Kaisa Group - the first Chinese real estate firm to default back in 2015 - saw some of its dollar-denominated bonds drop to as low as 35 cents on the dollar, pushing their yields to nearly 60% .

"We continue to maintain an underweight position in the real estate sector for our China equity portfolios," said Virginie Maisonneuve, Global CIO Equity at Allianz Global Investors. "We have no plan to add in the near-term," although she added Beijing should be able to contain the problems.

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