Hong Kong’s property stocks saw their largest loss since May 2020 amid growing investor angst about China’s property company Evergrande collapsing and the country’s real estate clampdown.
The Hang Seng Index (HSI) was down more than 3 percent with China and Japan closed for a holiday, the largest drop since May 2020.
Hong Kong real estate giant Henderson Land Development Co. also dropped by 13.9 percent, its biggest selloff in more than a year. Sun Hung Kai Properties Ltd. slumped by 10.34 percent and is also poised for its biggest loss since 2016. CK Asset Holdings Ltd. was also down by 9.32 percent.
Shares of China Evergrande Group dropped by 10.24 percent, after falling by as much as 17 percent earlier in the day. Shares of the group have fallen by more than 80 percent in 2021 as it struggles with crippling debt.
The company is more than $300 billion in debt, making it the world’s most indebted property developer, and it’s been scrambling to raise funds to pay its many lenders, suppliers, and investors. Evergrande has warned on multiple occasions that it could default, and its $305 billion of liabilities could spark broader risks to the country’s financial system if not stabilized.
If the property developer were to collapse, it would have a devastating knock-on effect on other Chinese and Hong Kong property developers that would spill out into the rest of the economy, according to Jenny Zeng, co-head of Asia Fixed Income at AllianceBernstein.
“In the offshore dollar market, there is a considerable large portion of developers [who] are implied to be highly distressed,” Zeng told CNBC on Sept. 17.
Zeng noted that developers “can’t survive much longer” if the refinancing channel continues to be shut. However, she downplayed reports likening it to the bankruptcy of Lehman Brothers 13 years ago, which triggered a 6.98 percent drop in the Dow Jones Industrial Average.
Zeng noted the fragmentation of the Chinese property market.
“Despite Evergrande’s size—we all know it is the largest developer in China, probably the largest in the world—[the company] still accounts for only 4 percent and now it’s even less of the total annual sales market,” Zeng said. “The debt, particularly the onshore debt, is well collateralized.”
Evergrande said on Sept. 20 that it has begun repaying investors in its wealth management products with real estate.
Added to the pressure created by debt-ridden Evergrande is a growing investor angst about China’s real estate clampdown, which has seen authorities move to curb the property industry in the past year, including tightening home-purchase rules and capping lending from banks while urging powerful property tycoons to pour resources and influence into backing Beijing’s interests.
It’s not yet clear exactly what actions officials will take in the clampdown on real estate or whether there’s a deadline, but investors are already concerned.
“People may be worried about whether they have to take up extra responsibility to build more subsidized housing,” Philip Tse, head of Hong Kong and China property research at BOCOM International, told Bloomberg. “Foreign investors will be concerned if administrative matters in China will lead to a price cap, more stringent purchasing limits, or some tax-payment proof is required in order to pay for buying a flat.”