Property Stocks In China Are Stumbling Due To Tax Concerns And Other Signals Of Instability

Property Stocks In China Are Stumbling

Property stocks in China slumped today as Beijing pressed ahead with plans for a property tax and new evidence of real estate market weakness emerged.

However, the central bank’s efforts to assuage worries over China Evergrande Group’s (3333.HK) debt troubles, as well as Chinese developer Kaisa Group’s (1638.HK) coupon payment for a dollar bond, helping to offset the general gloomy tone in the property industry.

The CSI300 Real Estate Index (.CSI000952), which monitors China’s top developers, dropped 2.6 percent.

Hong Kong property stocks performed better, with the. HSMPI index, which tracks mainland property businesses, trading flat. Click here to know How to Invest in Hang Seng Index

According to an essay published in the ruling Communist Party journal Qiushi on Friday, China’s President Xi Jinping urged for the country to “vigorously and steadily pursue” legislation for a property tax to prevent excessive speculation.

Property tax predictions are negative for real estate stocks, according to Rocky Fan, an economist at Sealand Securities, since “people would baulk at buying properties and take a wait-and-see attitude, affecting developers’ profits.

Concerns of spread have rocked global financial markets as a result of a liquidity problem at Evergrande, which has far more than $300 billion in debt.

Governor Yi Gang of the People’s Bank of China stated on Sunday that the economy is facing obstacles such as default risks for particular enterprises owing to “mismanagement,” and that regulators are keeping a close check on them “so they don’t become systematic risks.”

Another PBOC official said on Friday that the banking system’s spillover effect from Evergrande’s debt troubles was manageable, and that individual financial institutions’ risk exposures were not significant.

The PBOC’s statements on Friday were well received by investors, but some analysts are not so hopeful.

The PBOC is trying to downplay the impact on the market of Evergrande’s default, JP Morgan noted in a research note, adding Evergrande’s troubles are not isolated but indicate an industry-wide problem.

Authorities have tools to limit spillover risk; nonetheless, if no action is done, the risk of additional deterioration should not be underestimated, as it might lead to a halt in investment, decreased demand, budgetary challenges for local governments, and wider financial sector stress.

China’s economy grew at a slower pace than predicted in the third quarter, according to figures released on Monday, and industrial output again fell short of expectations.

China Vanke (000002.SZ) and Poly Development (600048.SS), two big developers onshore, both were dropped over 3%. So far this year, real estate stocks (.CSI000952) have lost 22%.

Top developers Country Garden (2007.HK) and Sunac China (1918.HK) both saw their Hong Kong-listed shares rise 1.4 percent and 4.2 percent, respectively.

Offshore bonds issued by Chinese developers have also risen, with Kaisa Group’s notes due June 2024 rising almost 6% to 54.34 cents on the dollar. Yuzhou Group (1628.HK), Zhongliang Holdings (2772.HK), and Zhenro Properties (6158.HK) all have bonds that have earned over 7%.

On Monday, Kaisa informed Reuters that it has paid $39.4 million in coupon for a dollar bond due October 16, and that it planned to transfer funds for a coupon due October 22 into investor’s accounts on Thursday.

Nonetheless, Moody’s lowered Kaisa’s corporate family rating (CFR) to “B2” from “B1” on Monday, and positioned all of the company’s ratings on evaluation for further downgrade, citing waning liquidity and increasing refinancing risk expectations over the next six to twelve months due to tight funding situations and the company’s big debt maturity.

Sinic Holdings (2103.HK) announced last week that it will likely default on a $246 million bond due on Monday. On Monday, Fantasia Holdings (1777.HK), which skipped a payment earlier this month, is owed another $21.44 million coupon.

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