HONG KONG • How far will Chinese President Xi Jinping go with his crackdown on China's real estate sector?
The question has suddenly become an urgent one on trading desks around the world. After months of treating the crisis at indebted developer China Evergrande Group as largely contained, global investors on Monday rushed to price in the risk that Mr Xi will miscalculate as he tries to curb China's property market excesses without derailing the economy.
The resulting market turbulence may add pressure on Chinese leaders to tap the brakes on policy tightening, or at least take steps to limit the fallout.
Goldman Sachs Group analysts called for the authorities to send a "clearer message" on how they plan to stop Evergrande from causing "significant spillovers" to the broader economy. Citigroup said officials may commit a "policy error of over-tightening". Economists at Societe Generale assign a 30 per cent probability to a "hard landing".
The sell-off on Monday left few risky assets untouched.
Hong Kong's Hang Seng Index tumbled more than 3 per cent, led by real estate companies, while the S&P 500 Index fell 1.7 per cent for its biggest drop in four months. The average price of junk-rated United States dollar notes from Chinese borrowers slid the most in about a year.
The Chinese authorities, who recently hired advisers to look into Evergrande, have provided no public assurances that there is a state-led plan to resolve the crisis.
Official media commentary has largely avoided the subject, apart from a tabloid that said Evergrande was an "isolated case", and called out Western media outlets for bashing the Chinese economy. There has been no clear evidence of state funds stepping into the domestic stock market, like they did in March.
The response so far has been largely limited to the People's Bank of China, which injected a net 90 billion yuan (S$18.8 billion) into the banking system last Friday. It added another 100 billion yuan last Saturday.
Evergrande has around US$300 billion (S$405 billion) worth of liabilities, more than any other property developer in the world.
It is a whale in China's high-yield dollar bond market, accounting for about 16 per cent of outstanding notes. Some US$83.5 million of interest on a five-year dollar bond comes due tomorrow, and failure to pay within 30 days may constitute a default. Evergrande also needs to pay a 232 million yuan coupon on an onshore bond the same day.
Goldman economists led by Dr Hui Shan wrote in a Sunday note: "With policymakers showing no signs of wavering on property market deleveraging, the latest headlines regarding Evergrande likely suggest that housing activity may deteriorate further in the absence of the government providing a clear path towards an eventual resolution."
With more than 200 offshore and almost 2,000 onshore subsidiaries, Evergrande has about two trillion yuan in assets - equivalent to 2 per cent of China's gross domestic product - according to Goldman Sachs calculations.
A messy spillover into an already-slowing housing market could be costly, with real estate accounting for 40 per cent of household assets in China. Data last week showed home sales by value slumped 20 per cent last month from a year earlier, the biggest drop since the onset of the coronavirus pandemic early last year.
The authorities appear determined to push ahead with their campaign to deleverage as well as cool the property market.
Mr Guo Shuqing, the chief banking regulator, last year identified banks' excessive exposure to the property market as the biggest risk facing the financial system. The challenge for officials is how far to go before their tough measures threaten to create the kind of financial instability that they are trying to avoid.
Regulators are increasing efforts to tame land and home prices that have fuelled China's property industry - and much of its economic growth.
China has in recent months tightened mortgage approvals and raised rates for first-time buyers, introduced rental controls in cities and suspended some centralised land sales. Chinese banks are being told to lower their lending to home buyers, and officials in May revived the idea of a national property tax. The government last year drafted what are known as "three red lines" - debt metrics that developers will have to meet if they want to borrow more.
The central government has shown it can stomach heavy market losses - whether at technology companies, online tutors or Macau casinos - as officials seek to achieve Mr Xi's goals of "common prosperity".
"Insisting on unchanged policies while the Evergrande overhang persists could trigger more weakness than the government is comfortable with," Citi analysts led by Dr Dirk Willer wrote.
"We will watch market signals to monitor whether this crisis could become more systemic."
BLOOMBERG
