China Property Shares Drop On Tax Worry, Signs of Weakness

Chinese property shares fell on Monday, as Beijing pushed ahead with plans for a property tax amid fresh signs of weakening in the real estate market.

But Chinese developer Kaisa Group‘s coupon payment for a dollar bond and the central bank’s efforts to calm nerves over China Evergrande Group’s debt woes, helped in part to offset the overall bearish mood in the property sector.

The CSI300 Real Estate Index, which tracks China’s biggest developers, fell 2.6%.

Hong Kong property shares fared a bit better, with an index tracking mainland property firms trading flat.

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China’s President Xi Jinping called on Friday for the nation to “vigorously and steadily advance” legislation for a property tax, which could curb rampant speculation, according to an essay in the ruling Communist Party journal Qiushi.

Rocky Fan, economist at Sealand Securities, said property tax expectations are negative for real estate shares because “people would balk at buying properties and take a wait-and-see attitude, hurting developers’ revenues.”

Global financial markets have been rocked by fears of contagion over a liquidity crisis at Evergrande, which has more than $300 billion in liabilities.

The People’s Bank of China Governor Yi Gang said on Sunday the economy faces challenges such as default risks for certain firms due to “mismanagement,” and that authorities are keeping a close eye “so they do not become systematic risks.”

On Friday, another PBOC official said the spillover effect of Evergrande’s debt problems on the banking system were controllable and individual financial institutions’ risk exposures were not big.

Investors reacted favourably to the PBOC’s comments on Friday but some analysts are not as optimistic.

“The PBOC is downplaying the market impact of Evergrande’s default,” JPMorgan wrote in a research note, adding that it thinks Evergrande’s problems are not isolated but represent an industry-wide problem.

“The policymakers have the levers to contain the spillover risk; but if no policy action is taken, the risk of further deterioration should not be under-estimated, which may lead to investment slowdown, weaker consumption, fiscal problems for local governments and broader financial sector pressure.

Economy Slowing

China’s economy expanded 4.9% in the third quarter, slower than expected, data showed on Monday, and industrial output also missed expectations.

New construction starts in September slumped for a sixth straight month, the longest spate of monthly declines since 2015, according to Reuters calculations based on data released by the National Bureau of Statistics.

Onshore, major developers China Vanke and Poly Development were both down over 3%. Real estate shares have fallen 22% so far this year.

However, Hong Kong-listed shares of top developers Country Garden and Sunac China climbed 1.4% and 4.2%, respectively.

Chinese developers’ offshore bonds also rallied, with Kaisa Group’s notes due June 2024 jumping over 6% to 54.34 cents on the dollar. A bond of Yuzhou Group, Zhongliang Holdings and Zhenro Properties all gained around 7%.

Kaisa said on Monday it had paid $39.4 million worth of coupon for a dollar bond due on October 16, and plans to transfer funds for coupon worth $35.85 million due on Friday, October 22 into bondholders’ accounts on Thursday.

Still, rating agency Moody’s downgraded the corporate family rating (CFR) of Kaisa on Monday from B1 to B2, and placed all its ratings on review for further downgrade, citing weakening liquidity and rising refinancing risk expectations over the next six to 12 months amid tight funding conditions and the company’s large debt maturity.

Sinic Holdings, which has a $246 million bond maturing on Monday, said last week it would likely default. Fantasia Holdings, which has missed a payment early this month, has another $21.44 million coupon due on Monday.

• Reuters with additional editing by Jim Pollard