China property debt rally to face volatility, fund managers say
A RECENT rally in China’s property debt fuelled by Beijing’s policy support runs the risk of tapering off as default risks for developers continue to linger.
China’s junk US dollar bonds rose for a fourth week to May 24, the longest streak since September. Global money managers, including at Pacific Investment Management, Fidelity International and abrdn say the sector is not out of the woods yet and more evidence of sustained gains is needed.
“After the strong rally, the sector may become more volatile and/or range bound from here,” said Joyce Bing, senior investment manager of Asia fixed income at abrdn. Any further rally will depend on more stimulus measures, she said.
China this month earmarked 300 billion yuan (S$57 billion) for state buying of unsold homes. The cheap funding along with other support measures helped buoy US dollar bonds of developers such as China Vanke, Longfor Group Holdings and Seazen Group, who have survived the crisis so far.
The average price of China’s high-yield US dollar notes rose to 86.9 US cents last week, the highest since September 2021, according to a Bloomberg index. The amount of real estate debt in distress fell to the lowest level of the year at about US$200 billion as at May 24, data compiled by Bloomberg show.
The momentum, however, is not enough to convince money managers to get bullish on China immediately. Investors need more signs of government support. Developers have defaulted on more than US$100 billion of onshore and offshore bonds since the real estate crisis began in 2021.
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“The sector is still seeking the bottom, and we foresee default risks for the surviving builders in the next 12 months,” said Stephen Chang, managing director and Asia portfolio manager at Pimco. “We will actively monitor weekly sales figures to gauge impact of the policies and the momentum of the bond price recovery.”
In early May, Agile Group Holdings, a developer of villa apartments and high-rise homes, defaulted for the first time on publicly issued US dollar bonds after struggling to make payments over the past three years.
“Unfortunately, at this juncture, we probably still don’t see an immediate significant impact on the credit fundamentals,” said Vanessa Chan, head of Asian fixed income investment directing at Fidelity International, referring to the property sector. “The developers under stress are still facing some near-term maturity walls and their refinancing options and availabilities will actually be the key for them other than the reliance of these policies that have been announced.”
To be sure, there are reasons for optimism too. Chinese cities have followed up with more measures after aid from the central government. Three of China’s biggest cities, Shanghai, Shenzhen and Guangzhou have slashed down-payment requirements and allowed room for cheaper home loan. China Vanke, the latest flashpoint in the nation’s property crisis, is in advanced talks with banks for a loan of about 50 billion yuan, Bloomberg reported.
“It’s time to relook at the sector and start adding exposure but investors should be selective and also nimble as we expect a range-bound market in the coming months,” said Zhi Wei Feng, senior credit analyst, Loomis, Sayles & Company. “With more market certainty, bonds from the survivors will be the first batch to recover to ‘normalized’ prices.” BLOOMBERG
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