China`s real estate difficulties remain

Wild swings in Chinese real estate stocks and bonds are holding investors on edge — these news headlines could create troubles in the sector to spill into the rest of the economy, states S&P Global Ratings.

While the fall in Evergrande’s shares has decreased, the volatility in other Chinese real estate companies has extended this month.

On Thursday, Kaisa shares quickly rose 20% following news it could stave off default. On the same day, a Shanghai-traded bond from developer Shimao fell 30%. The fall was reminiscent of a sharp sell-off in the company’s bonds earlier this month.

In a report earlier this month, Charles Chang, senior director and Greater China country lead for corporate ratings at S&P Global Ratings, said headlines could catch sentiment and drive contagion.

The risk Chang set out is that news reports regarding defaults, or even the potential for default, could frighten away Chinese homebuyers. And that drying up of demand would set developers out of business, along with the construction companies and different suppliers that work with them.

The consensus between economists is that the real estate slowdown is contained since it’s encouraged by a top-down government decision to limit reliance on debt in the property industry. The People’s Bank of China summed up this view in mid-October. They called Evergrande a single case. Moreover, they declared the overall health of the property sector.

But investors have become increasingly concerned regarding how Beijing’s crackdown would play out. News of the default of a far smaller developer, Fantasia, and developing financing troubles among other developers began to intensify a sharp sell-off.

The Markit iBoxx index for China high yield real estate bonds is sticking to monthly gains after a volatile few weeks. This includes a reduction of almost 18% in October and a nearly 11% fall in September.

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