China developers: the main quake is over but the aftershocks are not

A year ago the demolition of China’s property sector was well under way. Developers struggled to borrow, home buyers were on strike.

This year, sagging financial foundations have been underpinned. The central bank has made about $29bn in loans. Local banks have extended deadlines for borrowers.

A bounce in April’s new home prices was a sign of hope. But a surge in new court-ordered liquidations and developer defaults should give investors pause for thought.

Another Chinese developer, KWG Group, faced a court-ordered liquidation in Hong Kong earlier this month. It is the latest to default and faces repayment demands on $4.5bn worth of debt in coming months. Developers missing their interest payments have increased in numbers in recent weeks.

These events challenge the narrative that the worst of the property crisis has passed. KWG’s default comes as a surprise. It had not defaulted on a single coupon for its dollar bonds last year, even when most of its peers had.

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

True, regulators have provided plentiful financial support for developers and slashed mortgage rates, boosting new home prices. Yet analysts still expect the top-25 listed developers to report April’s sales down about a fifth compared with March. Guangzhou R&F Properties should record a sales plunge of nearly half.

That may not stymie optimists seeking value when Beijing is injecting liquidity into the system. Shares of Country Garden, the largest developer, and Vanke consistently trade below their book values. The latter had never done so before last year. Elsewhere, investors should step more gingerly. Shares of KWG are down 60 per cent this year. Its dollar bonds fell to as low as 20 cents on the dollar.

To survive an earthquake, you need to avoid the aftershocks as well as the main event. China’s property market has yet to fully settle.