Chinese stocks have been under pressure recently as investors worry that property and local debt crises have become a double whammy that will hurt corporate earrings.
Goldman Sachs cut its full-year earnings-per-share growth estimate for the MSCI China Index to 11% from 14% and also reduced the 12-month index target to 67 from 70. The new target implies a 13% increase from the closing level on August 18.
The investment bank said in a research note on Monday that “the ailing housing market and its potential contagion to the real and financial economies are the widely-cited reasons for the correction.” It said economic growth pressures in China have resulted in renewed downgrades in Chinese firms’ profit expectations.
The Hang Seng Index, benchmark of Hong Kong’s markets, on Monday fell 327 points, or 1.82%, to 17,623, the lowest level since last November. The Shanghai Composite Index dropped 38.98 points, or 1.24%, to close at 3,092.
Shares of the heavily-indebted Country Garden decreased 2.6% to 74 HK cents (9.43 US cents). Shares of Longfor Group, dubbed as the most financially-healthy Chinese property firm, plunged 3.39% to HK$15.98 after CLSA lowered its forecasts for the company’s earnings by 13.3%, 23.5% and 24.2% for 2023, 2024 and 2025, respectively.
Chinese banking stocks continued their falling trend on Monday. Agricultural Bank of China dropped 1.57% while Industrial and Commercial Bank of China was down 1.47%.
The People’s Bank of China (PBoC) said Sunday that it had held a virtual meeting with the National Administration of Financial Regulation (NAFR) and the China Securities Regulatory Commission (CSRC) on August 18 and urged major Chinese financial institutions to increase their support for the real economy, as well as to help prevent and lower local government debt risks.
“The country’s economic recovery has been a wave-like development and a tortuous process,” the meeting said. “Financial support for the real economy should be strong in intensity, steady in pace, sound in structure and sustainable in prices.”
It said financial institutions should enrich the tools and means to prevent and resolve debt risks, strengthen risk monitoring, assessment and prevention and control mechanisms, promote risk disposal in key areas, and “firmly hold the bottom line of having no systemic risk.”
Two separate crises
Many property developers in China are suffering from a liquidity crunch as they saw a decline in their contracted sales and net profits in the first half of this year. Separately, Chinese banks are urged by the central government to sacrifice their margins by extending loans for local government financing vehicles amid a local debt crisis.
The property and local debt crises are both caused by a drop in property demand in China. And they, in return, are dragging down the Chinese economy and domestic consumption.
As of last Friday, about 80 listed property developers had announced their results for the first six months of this year, of which 60% reported net losses. The combined losses amounted to at least 100 billion yuan (US$13.8 billion), according to a calculation made by the China Real Estate Weekly.
Yuzhou Group said it might have lost 6 to 7 billion yuan while Sunac China Holdings expected a first-half net loss of 15 to 16 billion yuan. Country Garden said it had lost about 45 to 55 billion yuan in the first half.
An unnamed executive of Country Garden told Yicai.com on Sunday that the company has enough financial resources to complete 400,000 apartments by the end of this year and 400,000 more in 2024 but for the moment it may not have enough cash to pay its domestic creditors fully.
China Times reported that Country Garden will hold meetings with its domestic creditors between Wednesday and Friday. It said the company will seek to extend by three years the payment of a 3.9 billion yuan bond, which otherwise will default if it is unpaid on September 2.
“Affected by multiple unfavorable factors, some property firms have faced difficulties in their operations this year,” said Bai Wenxi, chief economist at IPG China.“The weakening demand is one of the main factors restricting the recovery of the real estate market.”
Bai said risks in the property market are growing as many supportive measures have not yet been implemented.
“The profitability of property developers depends on the stability of their long-term operations. However, the current market sentiment is affected by various factors, including homebuyers’ expectation for a drop in income,” said Liu Shui, head of business research at the China Index Academy.
Liu said that whether or not the property market situation improves in the second half of this year will depend on the strength of the government’s supportive measures.
Supportive measures
The CSRC announced on August 18 that it had established a special working group, devised a dedicated work plan, and formulated a package of policies and measures. It said it would unveil new measures that can increase sources of funds, reduce transaction costs and improve convenience in trading in both the A-share and Hong Kong stock markets.
“We believe the policy tailwind could give a boost to securities firms’ fundamentals and, subsequently, earnings expectations could see improvement and average return-on-equity could trend up over the medium to long term,” the CICC, a Chinese investment bank, said in a research note on Monday. “Meanwhile, efforts to boost the activity of A-share and Hong Kong stock markets should also benefit the Stock Exchange of Hong Kong (HKEx).”
The PBoC on August 15 cut the rate on one-year medium-term lending facility (MLF) loans by 15bp to 2.5%. On Monday, it lowered the one-year loan prime rate (LPR) by 10 basis points to 3.45% from 3.55% earlier, while the five-year LPR was left at 4.20%. Analysts had previously expected that both the one-year and five year LPRs would be cut by 15 basis points.
Some analysts said the recent downward pressure on the Chinese currency means Beijing has limited room for rate cuts, which will widen China’s yield gap with other major economies.
Meanwhile, Cailian Press reported on Monday that the central government will allow 12 local governments, including those in Tianjin, Chongqing, Yunnan and Shaanxi, to issue 1.5 trillion yuan of special bonds to refinance their local debts in the second half of this year.
Caixin.com said local governments that can issue special bonds will have to cut their expenses. But it added that proceeds from the special bonds won’t be enough to resolve all the problems as local governments borrowed 35 trillion yuan of official debts, plus more than 40 to 50 trillion yuan of hidden loans.
A Zhejiang-based financial writer says it will take a very long time for local governments to resolve their debt problems as the process will involve a structural change in the Chinese economy.
He says local governments will cut the number of civil servants, and demand for fewer construction workers for their city renewal projects. He says as people now realise that there are no more “iron rice bowls,” or jobs for life, they will become more cautious in home purchases while this trend will continue to suppress property prices.
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