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China developer shares slide as Evergrande concerns simmer

The company logo is seen on the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China September 26, 2021. REUTERS/Aly Song

SHANGHAI, Oct 14 (Reuters) – Shares and dollar bonds of Chinese real estate firms slid again on Thursday as investors fretted about a debt crisis rippling through developers including China Evergrande Group (3333.HK), a day after the sector was hit with rating downgrades.

Evergrande, which has more than $300 billion in liabilities and 1,300 real estate projects in over 280 cities, missed a third round of interest payments on its international bonds this week.

The world’s most indebted developer, which has been trying to sell assets to raise funds, appeared to have made small progress towards that goal when Qumei Home Furnishings Group (603818.SS) announced in a filing on Thursday that it will buy out Evergrande group’s 40% stake in their furnishings joint venture for 72 million yuan ($11.18 million).

But some other Chinese developers have also warned they could default, and rising risks on Wednesday led credit agency S&P Global to downgrade to two of the sector’s bigger firms, Greenland Holdings (600606.SS) – which has built some of the world’s tallest residential towers – and E-house (2048.HK), and warn it could cut their ratings further.

Adding to the concerns of investors who have increasingly been hoping for policy easing to stabilise a wobbly recovery in the world’s second-largest economy, data on Thursday showed China’s annual factory gate prices rising at the fastest pace on record in September due to soaring raw material costs.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said persistent inflationary pressure would limit the scope of any monetary policy easing.

“But the most important policy in the property sector is not monetary policy, but the regulation related to leverage and bank loan supply to developers (and) home buyers,” he said.

“Therefore I think the government still has the option to loosen those policies to help the property sector. The big question is whether they are willing to do so. So far their policy stance seems quite firm.”

On Thursday, a sub-index tracking shares of Chinese property developers (.CSI000952)ended the day down 3.88% whilethe broad CSI300 blue-chip index (.CSI300) slipped 0.54%. Property shares have fallen nearly 20% this year, compared to a 5.7% fall for the CSI300.

China property shares would remain volatile in the near term, JPMorgan analysts said in a report.

“News on marginal easing will likely cause a short-term rebound, which, however, may not be very sustainable due to the likely ongoing concerns on the offshore bond market,” they said.

“A more sustainable rally may happen in January 2022 when banks have more front-loaded quota to extend credit to developers/mortgages.”

China property shares vs blue-chips

LIGHTNING RODS

In China’s onshore bond market, prices underscored continued volatility, with bonds of developer Shanghai Shimao (600823.SS) listed among both the biggest gainers and biggest losers on the day by the Shanghai Stock Exchange.

“Property bonds are lightning rods,” said a director at a local brokerage. Apart from the risk of debt contagion from Evergrande, higher mortgage rates – part of official efforts to rein in surging housing prices – are hitting the industry, he said. “Fundamentally, the high turnover of real estate companies is gone.”

In international debt markets, data provider Duration Finance showed Greenland Group Holdings’ 6.75% June 2022 bond was trading down more than 3 points at 60.175 cents, and Xinyuan Real Estate’s 14.5% September 2023 bond slumped nearly 8 points to 63.9 cents.

Markets in Hong Kong were closed on Thursday for a public holiday.

Global worries over the potential for spillover of credit risk from China’s property sector into the broader economy kept spread – or risk premium – on investment-grade Chinese firms (.MERACCG), which tend to have the most solid finances, near its widest in more than two months on Wednesday evening U.S. time.

The spread on the equivalent high-yield or ‘junk’-rated index (.MERACYC) that tracks firms such as Evergrande pulled back on Wednesday, but remained close to all-time highs.

($1 = 6.4391 Chinese yuan)

Reporting by Andrew Galbraith; Editing by Muralikumar Anantharaman and John Stonestreet

Our Standards: The Thomson Reuters Trust Principles.

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Biden takes cautious tack on China as tensions simmer

Relations between the United States and China are at a low point in the post-Trump era, and nearly three weeks into his term President BidenJoe BidenDOJ dismissing suit against author of Melania Trump tell-all book Google expands election security aid for federal, state campaigns Biden backs House Democrats’ proposed threshold for COVID-19 checks MORE has yet to talk to his counterpart in Beijing, President Xi Jinping.

Biden has vowed to take a different approach to China than former President TrumpDonald TrumpDOJ to seek resignations of most Trump-appointed US attorneys: report Trump attorney withdraws request to not hold impeachment trial on Saturday Kinzinger in op-ed calls on GOP senators to convict Trump in impeachment trial MORE, who campaigned against China’s trade policies and then blamed Beijing for the coronavirus that devastated the U.S. economy in Trump’s reelection year.

“I’m not going to do it the way Trump did,” Biden said about his approach to Beijing, in an interview with CBS on Sunday. “We’re going to focus on international rules of the road.”

Biden is facing heavy pressure to take a tough line on Beijing, with Republicans already telegraphing it will be an issue in the 2022 midterms — and likely the 2024 presidential election.

But the president has also said he is prepared to cooperate with Beijing when it is in the interest of the U.S.

This includes efforts to defeat COVID-19, confront climate change, expand nuclear non-proliferation – in particular bringing Iran back to compliance with the 2015 nuclear agreement and reining in North Korea’s nuclear threat — and, most recently, restore democracy in Myanmar following the military coup.

Tensions between the two countries are high in the post-Trump era in part because of the former president’s rhetoric – who repeatedly called COVID-19 the “China virus,” referring to the fact that the first cases were identified in the Chinese city of Wuhan – but also because lawmakers in both parties are criticizing Beijing over a host of policies affecting the economy and national security.

The tensions most recently spilled over into the South China Sea after Beijing denounced joint exercises by two U.S. carrier groups, calling it an attempt by the U.S. to “flex its muscles” in the region that damages “peace and stability.”

The comments followed Beijing’s earlier frustration against the U.S. when an American warship sailed close to Chinese-controlled islands in the waters, where a number of regional countries have made claims.

The U.S. 7th fleet said the move was a “freedom of navigation operation” but the Chinese military accused the U.S. of infringing on China’s sovereignty and security.

Yet Chinese officials have also repeatedly called for “no confrontation, no conflict, mutual respect and win-win cooperation” with the U.S.

Bonnie Glaser, director of the China Power Project at the Center for Strategic and International Studies, said Biden was critical in his foreign policy speech last week against Chinese policies – where he said American leadership must confront “ambitions of China to rival the United States” – but that the president and his team have showed no rush to engage with Beijing.

“They have other priorities, including coordinating with allies and partners,” she wrote in an email to The Hill. 

“Meanwhile, the Chinese are sending the message that they are willing to improve bilateral ties, but only if it is on Chinese terms. There has yet to be a serious conversation between the two countries about how to manage their differences or how to cooperate on issues where they may have common ground.”

Biden said in his interview Sunday with CBS that there was no reason “not to call” Xi, and that the two have “a lot to talk about.”

The president said he does not seek conflict between the two nations but warned that “there’s going to be extreme competition.”

Secretary of State Antony BlinkenAntony BlinkenColombia to register thousands of Venezuela migrants in bid to give them legal residency The Hill’s 12:30 Report: Senate prepares for impeachment trial to start Biden administration announces plans to rejoin UN human rights council MORE is so far the highest-level U.S. official to speak with the Chinese, in a call last week with senior Chinese Communist Party official and diplomat Yang Jiechi.

The conversation largely focused on adversarial aspects of the relationship, with the secretary raising the issue of human rights abuses in Tibet, Hong Kong and Xinjiang. On the latter issue, the secretary has sided with the Trump administration over its determination that China is carrying out genocide against the Muslim Uighurs and other ethnic groups.

Blinken also pushed for China to condemn the military coup in Myanmar.

Beijing has so far refrained from calling the military takeover a coup, though it joined a United Nations Security Council statement calling for the restoration of democratic rule in the country and release of detained, democratically elected government officials.

Both Blinken and national security adviser Jake SullivanJake SullivanOvernight Defense: Biden announces end to US support for offensive operations in Yemen | Pentagon orders mask-wearing indoors and out | Military COVID deaths mounting Biden: US taking ‘urgent’ steps to improve cybersecurity Biden condemns jailing of Navalny in Russia MORE, who has not spoken with any Chinese officials, have held calls with allies in Europe and Asia about confronting threats from China.

Sullivan had earlier said it is a priority to get on the same page with allies about dealing with Beijing, during an event with the U.S. Institute of Peace last month.

“I think China is right at the top of the list of things that we’ve got to work together on and where there is work to do to get fully aligned,” he said.

Sullivan also said the U.S. must be prepared to impose costs on Beijing over its human rights abuses, but did not elaborate on those measures.

Yet Republicans are laying the groundwork to more forcefully pressure Biden over getting tough with Beijing. They are particularly critical of China’s influence at the World Health Organization.

Biden rejoined the global body on his first day in office, reversing Trump’s withdrawal from the organization in July over criticisms it did not confront Beijing over the spread of COVID-19.

Sens. Rick Scott (R-Fla.) and Josh HawleyJoshua (Josh) David HawleyOvernight Defense: Pentagon says extremist groups ‘very aggressively recruit’ troops | Capitol Guard deployment estimated at 3M | No US combat deaths in Afghanistan for a year | VA secretary confirmed Senate confirms Denis McDonough to lead VA under Biden The GOP’s impeachment ‘prisoner’s dilemma’ MORE (R-Mo.) seized on these criticisms on Tuesday, introducing legislation aimed at withholding U.S. funds from the WHO. Their statement followed the release of a WHO investigation they criticized as not addressing Beijing’s role in the spread of the virus.

“The mission of the WHO is to get public health information to the world so every country can make the best decisions to keep their citizens safe,” Scott said in a statement. “The WHO not only failed its mission, but it failed the world when it comes to the coronavirus. They served as a puppet for the Chinese Communist Party – parroting misinformation and helping Communist China cover up a global pandemic.”

The bill’s introduction coincided with the WHO’s release of preliminary findings of an investigation into the origins of COVID-19 in China, which found the disease “most likely” originated in animals before jumping to humans, though it did not evaluate the shortcomings of the global response.

Hawley, who is considered a potential 2024 presidential candidate, criticized the WHO as prioritizing “the Chinese Communist Party’s interests over building a healthier world.”

Sen. Tom CottonTom Bryant CottonOvernight Defense: Pentagon says extremist groups ‘very aggressively recruit’ troops | Capitol Guard deployment estimated at 3M | No US combat deaths in Afghanistan for a year | VA secretary confirmed Senate confirms Denis McDonough to lead VA under Biden The GOP’s impeachment ‘prisoner’s dilemma’ MORE (R-Ark.), also a potential presidential candidate, tweeted in response to the investigation that “[for] over a year now the Chinese Communist Party apologists at [the WHO] have tried to spin the origins of the coronavirus.”

Former U.S. Ambassador to the U.N. Nikki HaleyNikki HaleyBiden administration announces plans to rejoin UN human rights council US will rejoin UN Human Rights Council: report 5 lawyers leave Trump impeachment team ahead of trial: reports MORE, yet another possible Republican presidential contender, also criticized the WHO investigation, tweeting that it should have focused on “when China knew” about the coronavirus “and why they kept it from the rest of the world…”

Sen. Lindsey GrahamLindsey Olin GrahamDOJ to seek resignations of most Trump-appointed US attorneys: report Lawmakers lay blame on Trump over riot as second impeachment trial looms Sunday shows – Trump impeachment trial, stimulus dominate MORE (R-S.C.), in an interview with CBS’s Meet the Press on Sunday, warned against Biden throwing out Trump’s foreign policies wholesale, including those related to China.

“I would slow down if I were President Biden and re-evaluate some of these Trump policies and keep them in place if they make sense,” he said.



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