China property shares drop on signs of slowdown

China property shares

The CSI300 Real Estate Index dropped more than 2%, while an index tracking the broader sector was down nearly 1.7%

China’s property shares dropped on Monday on signs of slowdown in the sector and even as the central bank said spillover effects from China Evergrande Group’s debt woes were controllable.

The CSI300 Real Estate Index dropped more than 2%, while an index tracking the broader sector was down nearly 1.7%.

Hong Kong property shares fared a bit better, with an index tracking mainland property firms down 0.3%. The Hang Seng property index shed 0.7%.

Global financial markets have been rocked by fears of contagion over a liquidity crisis at China Evergrande Group, which has over $300 billion in liabilities.

The People’s Bank of China Governor Yi Gang said on Sunday the economy faces challenges such as default risks for certain firms due to “mismanagement,” and that authorities are keeping a close eye so they do not become systematic risks.

On Friday, another PBOC official said the spillover effect of Evergrande’s debt problems on the banking system was controllable and individual financial institutions’ risk exposures were not big.

Investors reacted favourably to the PBOC’s comments on Friday with the risk premium on the China’s 5-year credit default swaps narrowing 4.8 basis points to 49.4, according to Lucror Analytics.

But some analysts said the spillover effect could be bigger than the PBOC stated.

The PBOC is downplaying the market impact of Evergrande’s default, JPMorgan wrote in a research note, adding that it thinks Evergrande’s problems are not an isolated cases but represent an industry-wide problem.

The policymakers have the levers to contain the spillover risk; but if no policy action is taken, the risk of further deterioration should not be under-estimated, which may lead to investment slowdown, weaker consumption, fiscal problems for local governments and broader financial sector pressure, it wrote.

China’s new construction starts measured by floor area contracted in the first nine months of the year, as Beijing’s crackdown on the property sector cooled demand and deterred developers from starting new projects.

New construction starts dropped 4.5% in January to September, widening the 3.2% decline in the first eight months of the year, according to data released Monday by the National Bureau of Statistics.

We see no major change to Beijing’s property curbs from the PBOC presser, wrote Ting Lu, chief China economist at Nomura.

He said: It will take much more damage to financial markets and the real economy before Beijing would be willing to truly unwind some of those curbs.

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