China property bonds are ‘no longer analysable’ as crisis grows

THE crisis in Chinese property dollar bonds has become so extreme that an analyst who’s been covering the market since its inception in 2005 says meaningful analysis is no longer possible.

“The proven investment approach is that it won’t go wrong being negative or more negative ahead of the market,” said Zhi Wei Feng, a senior analyst at Loomis Sayles Investments Asia, who was working on credit research at Barclays Capital in 2005, when the first-ever Chinese real estate firm dollar bond was issued.

“It is very frustrating when the market is no longer analysable,” she said.

China’s offshore property notes have plummeted to record lows that reflect deep distress, as defaults mount to unprecedented levels. The rout has its roots in a crackdown that started in 2020 on excessive leverage at developers as well as speculation among homebuyers and has been worsened by Covid restrictions that exacerbated a slump in housing sales.

The market value of investment-grade Chinese real estate dollar bonds has dropped about 23 per cent in the past month, versus a 7 per cent decline for the broader Bloomberg USD China IG bond index. These better-quality builders’ notes now trade at about 73 per cent of par value on average, compared with 88 per cent a month ago and about par as of the end of 2021, the index shows.

“Fundamental analysis of sector and company operating and financial numbers has given way to market chatters,” Feng added. She said that’s being reinforced by the continued defaults, especially among builders which had been considered relatively strong or that have stayed current with releasing financial results and whose refinancing schedules hadn’t suggested immediate distress.

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It’s an even worse picture for junk-rated firms. The average price of Chinese high-yield dollar securities, mostly issued by property companies, dropped to a record low of 50.2 US cents this week, according to a Bloomberg index.

“Such prices are certainly not justified for any normal market but they are justified for a black box market which is beyond analysis,” Feng said. “We are going back to a sector of policy risk only while investors have lost all confidence towards the sector and the companies.” BLOOMBERG