There was a brief moment of trader terror around the close yesterday, when stocks suddenly seemed to lose steam after shocking inflation prints both in China and the US, and much of the upward momentum that recently led to 9 consecutive all time highs seemed to evaporate. And then, just as the Fed needed someone to blow a new life into risk assets, a boost came from a very unexpected place: China's property sector, which many had left for dead, and which we said was about to soar amid the previously reported news that Beijing is starting to soften its regulatory crackdowns on both tech names and property developers.
Here we go: China Developers Jump on Evergrande Payment, PBOC Easing News;— zerohedge (@zerohedge) November 11, 2021
Sunac China up as much as 7.6% in Hong Kong, China Resources Land +4.9%, Country Garden +3.8%
Huge squeeze coming. Will spillover you rest of EMs https://t.co/AjDD3OYkr2
After we reported on Wednesday that China finally appeared to blink and amid "Contagion From the Property Sector Crash, Regulators Were Set To Ease Bond Rules", shares in Chinese property developers booked their best two-day gain in six years, joined by a jump in technology stocks, as investors speculated Beijing may soften regulatory crackdowns on the two industries.
Sentiment reversed after Dow Jones reported that China’s central bank is considering easing rules to help developers sell assets to avoid defaults, after a similar report by local media Cailian. On Wednesday, the state-run Securities Times reported that rules for developers to issue domestic bonds may be loosened.
The news led to a violent rally in Chinese housing stocks: as shown in the chart below, the Bloomberg index of developer shares jumped 5.6%, extending a two-day advance to 12%, the most since July 2015. Sunac China Holdings surged 8.4% in Hong Kong and China Evergrande Group advanced 6.8%. China Merchants Shekou Industrial Zone Holdings Co. and Gemdale Corp. were among the top performers on the CSI 300 Index Thursday.
Here's what happened: as Rabobank summarizes the latest developments out of a China which appears to have once again folded on its deleveraging/debt austerity campaign, word now seems to be the PBOC will help “good” developers sell bonds to Chinese banks to refinance their CNY debts (at lower interest rates, despite soaring credit risk). At the same time, the PBOC took the rare step of announcing mortgage lending picked up in October to CNY348bn (USD54bn) vs. CNY247bn (USD38bn) in September despite the controls in place.
"That’s the tactical picture", wrote Rabo's Michael Every. The strategic one is a WSJ article which claims Beijing aims for a “controlled implosion of the real-estate giant, selling off some assets while limiting damage to home buyers and businesses.” And while less attention is allegedly being paid to foreign investors - it is just enough not to let faith collapse completely. "The meta picture is what China’s growth model looks like once property speculation is excised, not just in 2022, but from here on out."
In any case, between the report that China may ease its "three-red lines", and yesterday's news that Evergrande had just barely made its latest bond interest payments (after selling two of its private Gulfstream jets and the Chairman pledging two of his Hong Kong mansions), confidence in the property sector has been lifted by a spate of positive news this week that’s raised expectations the government may be relaxing restrictions on how developers raise funds.
At the same time, a series of articles published in state media in the past few days signal support measures are on the way to help developers tap debt markets, potentially easing the liquidity crunch that began with Evergrande’s meltdown five months ago, Bloomberg reported.
Reports that regulators may adjust rules so that real estate firms can sell debt in the domestic interbank market emerged alongside another report which showed that state-owned enterprises are pushing for the right to increase borrowing for mergers, which could make it easier for them to scoop up struggling developers. State-run banks meanwhile boosted lending to the sector last month, state media reported.
“The reopening of the onshore bond market is critical,” said Raymond Cheng, head of China-Hong Kong research at CGS-CIMB Securities Ltd. “Without this, the market had previously expected that half of developers would have difficulties repaying bonds due in the next three to six months.”
To be sure, the moves, if implemented, fall short of a wide-ranging bailout of the embattled sector, and don’t suggest President Xi Jinping is abandoning his “three red lines” policy that limits borrowing by property firms. Xi has stressed many times that housing is “for living in, not for speculation,” as he looks to lower property prices as part of his “common prosperity” initiative. Still, the potential easing offers some relief for developers that have been shut out of credit markets, with yields on junk-rated bonds soaring to a decade-high of almost 25% this week. It also provides some stability for financial markets, which have been roiled by the Evergrande crisis.
The credit easing and market rebound come at a key juncture for Xi, who was scheduled to deliver a landmark document Thursday that gave him the mandate to rule for life as a major Communist Party summit wraps up in Beijing. The president is also expected to meet his U.S. counterpart Joe Biden as early as next week. The Federal Reserve recently warned that the fragility in China’s real estate sector could spread to the U.S. if it deteriorated dramatically.
As reported yesterday, state-run banks are also stepping up support for the property sector. Lending to developers rose sharply in October, and the momentum is expected to extend into November, the country’s flagship securities newspapers reported. The China Securities Journal, Shanghai Securities News and Securities Times all carried similar reports Thursday on their front pages, which elaborated on October credit data released by the People’s Bank of China. Mortgages also picked up in the month, the central bank said a separate report, releasing rare monthly data in an apparent attempt to calm concerns.
“The unusual disclosure of a monthly figure is clearly another attempt to calm market sentiment,” Gavekal Dragonomics economists Wei He and Xiaoxi Zhang wrote in a note. “The data confirms anecdotal reports that banks have been allowed or encouraged to pick up the pace of mortgage lending.”
This barrage of unexpectedly good news coupled with the reversal in bearish sentiment viciously squeezed short sellers who were forced to cover, adding fuel to the rally.
Echoing the lament from now defunct hedge fund manager Russell Clark, Castor Pang, head of research at Core Pacific-Yamaichi International in Hong Kong said that "everything is policy-driven these days, you never know when the regulations will tighten again.” He added that “If there’s a lack of positive policy catalysts in the future, we’ll easily see a reversal in the stock rallies."
And that's precisely what helped push broader market sentiment sharply higher overnight, while China’s high-yield bonds extended gains, climbing 2 to 8 cents on the dollar, on track for the biggest jump in at least three weeks. A China Aoyuan Group Ltd. dollar bond rose 11.6 cents on the dollar to 40.3 cents, according to Bloomberg-compiled data, on pace for a record gain after 16 straight declines.
Meanwhile, optimism spread to technology shares after Reuters reported that Didi Global is preparing to reintroduce its apps in China by the end of the year as regulators wrap up investigations into the ride-hailing company. The Hang Seng Tech Index erased an earlier loss to rally 1.8%. Kuaishou Technology jumped, while Tencent Holdings Ltd. pared losses to 1.2% after disappointing third-quarter results.