How Bad Are Things in China’s Property Market?

Sales Have Tumbled

Contracted sales, or the value of new contracts that developers signed with home buyers, dropped sharply in the last few months of 2021, causing many property firms to miss their annual sales targets. Contracted sales for the top 100 developers fell 9% for all of last year, according to figures from China Real Estate Information Corp., reflecting declines in both prices and volumes. Official data shows new starts by developers fell more than 11% in 2021 and property investment tailed off in the later part of the year.

Dollar-Bond Defaults Have Ballooned

Chinese developers that collectively have tens of billions of dollars of international bonds outstanding have failed to repay investors as promised. Some have missed interest or principal payments, while others have cajoled bondholders to swap debt for less attractive new securities. This process, known as a distressed debt exchange, is often considered equivalent to defaulting by rating companies and investors.

The Bond Market Is Separating the Weak From the Strong

Investors have dumped bonds from financially weaker developers, like Evergrande, indicating deep skepticism that these debts will be repaid in full. The selloff has fed a vicious circle, all but closing the market for new bond sales and thus making it more likely that many struggling developers will have to default on debts that they can’t refinance.

Some stronger developers with state backing, like China Vanke Co. , have been relatively unscathed. But the volatility has spread, and big real-estate groups with comparatively high credit ratings that don’t have state backing, like Shimao Group Holdings Ltd. , and more recently Country Garden Holdings Co. , have also seen large swings in their bond prices recently.

And Property Stocks Have Crashed

The debt-market malaise is grabbing headlines in part because Chinese property makes up such a big part of the Asian junk-bond market and because investors are eager to see how foreign bondholders are treated. But the sudden downturn has also fed steep selloffs in the stocks of many Hong Kong-listed Chinese developers.

On the Bright Side, Home Price Declines Look Modest

Recent official statistics show that prices for new homes have begun to fall, in their first pullback since early 2015, although the decline moderated in December. Statistics for 70 major cities show secondhand home prices are also edging lower. Some local governments have introduced measures to prop up prices, including extending subsidies and warning developers against offering big discounts.

…And Some Lending Data Appears to Be Improving

Chinese authorities have softened some of their rhetoric on property, suggesting they are wary of overdoing their assault on what is a major driver of Chinese growth. The People’s Bank of China recently cut some key interest rates, including a five-year lending rate that is commonly used as a reference for pricing mortgages, as part of a wider shift to ease policy. The central bank has begun detailing monthly increases in mortgage lending—which totaled 401 billion yuan in November, or roughly $63 billion—apparently to reassure markets that both supply and demand for home loans remain healthy. Broader household credit data tells a similar story.

Still, the Pain Isn’t Over Yet

Developers have a mountain of offshore debt to refinance in the first few months of this year. While the heavyweight Country Garden was recently able to sell convertible bonds, selling new debt or convertible bonds won’t be an option for most companies. And regulators have also made it hard for companies to redeploy the cash that sits within individual projects, since most of that was provided by home buyers as prepayments for unfinished units. Recent reports that China could make it easier for developers to access that cash helped spur a slight recovery in stock and bond prices, but some analysts and investors are skeptical about how much difference this will make in practice.

For companies that can’t quickly find alternative sources of funding—such as by selling assets or getting new loans or equity funding from rich controlling shareholders—the next stop could be either a full default, or coercing bondholders into a debt swap.

—Anniek Bao contributed to this article.

Write to Quentin Webb at [email protected]