China Developers: Mainquake Is Over, But Aftershocks Are Not

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A year ago, the demolition of China’s real estate sector was underway. Developers struggled to borrow, homebuyers were on strike.

This year, the sagging financial foundations have been shored up. The central bank has done about $29 billion in loans. Local banks have extended terms for borrowers.

A rebound in new home prices in April was a hopeful sign. But a spike in new court-ordered liquidations and developer defaults should give investors pause.

Another Chinese developer, KWG Group, faced a court-ordered liquidation in Hong Kong earlier this month. It is the last to default and faces demands to pay a debt worth 4.5 billion dollars in the coming months. Developers lose their interest payments have increased in number in recent weeks.

These events challenge the narrative that the worst of the housing crisis is over. The KWG default is a surprise. He hadn’t defaulted on a single coupon on his dollar bonds last year, even when most of his peers had.

Other signs of weakness have appeared among the big real estate groups. China Vanke, the second largest local developer, missed its earnings estimates. Its share price, down a fifth this year, is approaching five-year lows again.

It is true that regulators have provided abundant financial support to developers and slashed mortgage rates, boosting new home prices. However, analysts still expect the top 25 listed developers to report that April sales were down around a fifth compared to March. Guangzhou R&F Properties should see sales drop by almost half.

That may not hinder value-seeking bulls when Beijing is pumping liquidity into the system. Shares of Country Garden, the largest developer, and Vanke are consistently trading below their book values. The latter had never done it before last year. Elsewhere, investors should tread more cautiously. KWG shares are down 60 percent this year. Their dollar bonds fell as much as 20 cents on the dollar.

To survive an earthquake, you need to avoid aftershocks and the main event. China’s real estate market has not yet fully settled.