China’s real estate uncertainties persist, fueling market anxiety

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

While the plunge in Evergrande’s shares has abated, the volatility in other Chinese real estate companies has continued this month.

On Thursday, Kaisa shares briefly popped 20% after news it could stave off default. On the same day, a Shanghai-traded bond from developer Shimao plunged 30%, reminiscent of a sharp sell-off in the company’s bonds earlier this month.

“Headlines can hit sentiment and drive contagion,” Charles Chang, senior director and Greater China country lead for corporate ratings at S&P Global Ratings, said in a report earlier this month.

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

The consensus among economists is that the real estate slump is contained, since it’s driven 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, calling Evergrande a unique case, and affirming the overall health of the property sector.

But investors have grown increasingly worried about how Beijing’s crackdown would actually play out. News of the default of a far smaller developer, Fantasia, and growing financing troubles among other developers, began to exacerbate a sharp sell-off.

The Markit iBoxx index for China high yield real estate bonds is clinging to monthly gains after a volatile few weeks — including a drop of nearly 18% in October and an almost 11% fall in September.

“It’s a really trying time for investors right now, probably more for bond investors than equity investors, because what we’re really watching is a policy transition unfolding in real time,” Jennifer James, portfolio manager and lead emerging markets analyst of Janus Henderson Investors, told CNBC earlier this month.

Even worse for foreign institutional investors, typically more comfortable with detailed messaging from companies and policymakers, China’s system tends to rely more on broad government statements and cautious corporate disclosures.

This lack of clarity has been a longstanding issue with investing in China-related assets.