Why China Property Stocks Fall to Five-Month Low
A worsening crisis in China’s real estate sector has dragged shares in the industry to their lowest in five months. Home sales are falling further, and the failure is spreading to the nation’s most indebted developers. Bloomberg Intelligence’s index of developer stocks fell 2.3% to its lowest level since March 16. Country Garden and Guangzhou R&F Properties led to the decline. Each lost at least 6%.
The outlook for the industry has become bleaker after data showed home sales across the country rose amid growing mortgage boycotts. China Evergrande failed to unveil a long-promised restructuring framework on time. Investors’ confidence has also weakened regarding the government’s plan to seize idle land from developers to help complete stalled projects. A move that could cost lenders access to some of the builders’ most valuable assets.
According to the founding partner of Beijing Shengao Fund Management, recent developments show that defaults are almost impossible for developers to reverse. Realistically, developers will have to get huge discounts on asset disposals. This implies a low recovery rate for creditors. China’s Credit traders said that junk dollar bonds were little changed on Monday morning. According to the Bloomberg index, the total yield of these notes fell 7.9% in July. This is the biggest loss since February and a record-extending 11th straight slump.
China Property Stocks
The recent weakness in developer stocks followed fresh signs of trouble in China’s property sector and the country’s wider economy. According to preliminary data compiled by the China Real Estate Information Corporation, the combined contract sales of the country’s top 100 developers fell 39.7% in July. This highlights the weakness of the recovery amid the COVID outbreak.
Also weighing on investor sentiment is news that China is considering a plan to seize undeveloped land from struggling real estate companies. Therefore, to use it to finance the suspended housing projects. However, the initiative will help to alleviate angry buyers of unfinished houses. This can potentially remove a major source of assets for lenders who try to limit losses during debt restructuring.
In China, Evergrande failed to meet a preliminary restructuring plan promised by the end of July. Instead, he promised to announce something specific later this year. At the epicenter of the sector’s debt crisis, Evergrande also said separately that the unit should sell shares after losing an arbitration ruling in a regional bank. According to analysts, the delay in announcing the detailed plan is disappointing. Unfortunately, however, investors have few options other than to wait. There could be more motions if Evergrande delays the process.” The sale of the unit’s stake in Shengjing Bank, a local lender in northeast China, could prompt more onshore lenders to protect their interests.
UK Shares and Inflation
Britain’s top share index extended its winning streak on Monday. HSBC rose after delivering an upbeat earnings outlook. Easing inflation expectations dampened hopes for a super-moderate rate hike by the Bank of England this week. The FTSE 100 rose 1.1% to hit a seven-week high on Friday. HSBC jumped 5.9% after Europe’s biggest bank announced a higher profit target and an outlook for an increased dividend.
The broad banking index added 1.5%. Pearson rose 5.6%. The education group reiterated its full-year profit outlook. The domestically focused mid-cap index gained 1.6% after hitting a seven-week high last week. Quilter jumped 13.8% after media reports said NatWest was considering a bid for the fund manager. British public inflation expectations fell again in July.
