More problems for the Chinese property sector, financial system and wider economy with no growth in house prices in September for the first month in more than a year.
It is a development linked to struggling developer China Evergrande’s efforts to keep afloat – a prospect that’s been made harder by news that it will now not sell a majority stake in its property services business, raising further doubts about its future.
At the same time another developer formally defaulted on its debt and a third saw its credit ratings slashed.
And to add to the growing list of concerns, China Evergrande is approaching a key date that could see it tip over into default on an interest payment on October 23 which is when the 30-day grace period ends from the missed payment in September.
All this on top of the slide on spending and investment in the property sector in September – a not unexpected development given the extensive publicity of the problems and the increasing difficulty to borrow and buy property thanks to tougher government rules.
Those tougher rules and restrictions help explain why house prices stopped growing across China last month for the first time since early 2020.
The halt in property price rises though, if it continues for much longer, has the potential to trigger a fall in the value of collateral for billions of dollars in Chinese home loans which in turn will put pressure on banks to call loans and strain the already damaged finances of developers and others in the sector.
The average new home price in 70 major Chinese cities was unchanged in September from August, compared with 0.2% growth in August, according data released by the National Bureau of Statistics on Wednesday.
The data revealed that just 27 cities reported month-on-month gains, compared with 46 in August, the lowest since February 2020 at the height of China’s COVID-19 outbreak.
Compared with a year earlier, China’s new home prices grew 3.8% in September, the slowest in nine months, easing from a 4.2% increase in August.
(By way of contrast, house prices in Australia and the US are rising by around 20% a year at the moment).
As a result of the halt, analysts now fear that the current 4th quarter of the year will see property markets in most cities “will enter an obvious adjustment cycle.”(That’s Chinaspeak for falls in price cutting and falling prices as a result).
While the weaknesses are apparent in small and medium tired cities, even China’s largest cities are now starting to weaken.
Reuters pointed out that new home prices fell for the second month in Guangzhou, while Tianjin and Chengdu saw their first monthly declines this year in September. Prices in Beijing stalled.
And overhanging this is the slow collapse of the development sector which is weighed down by too much debt and too little cash coming through the door and banks and financiers under government pressure not to bail them out.
Reuters says Evergrande has shelved plans to sell a majority stake in its property services unit while a smaller developer, Sinic formally declared default and a smaller rival, Kaisa was crunched by another credit rating cut.
Reuters reported that Evergrande had been forced to stall its proposed $US2.6 billion, 51% stake sale to smaller rival Hopson Development after failing to win the blessing of the Guangdong provincial government which is overseeing Evergrande’s restructuring.
Reuters reported last week Chinese state-owned Yuexiu Property had pulled out of a proposed $US1.7 billion deal to buy Evergrande’s Hong Kong headquarters building over worries about the developer’s dire financial situation.
That’s $US4.3 billion in valuable cash that has been blocked from flowing to Evergrande because of fears about the company’s solvency which seems odd because the blocked payments will increase pressure on its solvency.
A small positive was the leaked news that Hengda Real Estate Group Co, Evergrande’s flagship unit, has though transferred funds to pay an ‘onshore’ bond coupon of 121.8 million yuan ($US19 million).
It seems Evergrande needs to prioritise its limited funds towards the domestic market where the stakes are much higher for the country’s financial system and not for foreign loan holders.
That means the chances of the three missed coupon payments in the past month on foreign debt being paid after the end of 30 day grace periods, is now very small.
An Evergrande bond due March 23, 2022 will officially be in default if the company does not make good after a 30-day grace period for a missed coupon payment that had been due on September 23.