China's property sector support fails to lure bond investors

THE battered bonds of Chinese property developers are showing tentative signs of a rebound, but long-term investors are keeping away until they see signs of a deeper recovery.

High-yield US dollar-denominated bonds of companies, such as Powerlong Real Estate and Country Garden, rallied from late November, cheered by the Chinese central bank’s and banking regulator’s 16-step plan to support the ailing sector.

The measures instilled hopes that the regulatory squeeze and liquidity crunch, which have beset the industry since mid-2020, would ease.

But the rally was narrowly confined to a handful of bonds, whose issuers announced plans to boost their capital.

Prices of Powerlong’s dollar bonds rallied in the days after the 16-step plan was announced, in particular after sources told Reuters that China’s central bank would offer cheap loans to financial firms to buy developers’ bonds. The company said it had signed an agreement with Shanghai Rural Commercial Bank for a credit line of 5 billion yuan (S$973.6 million).

Its US$535 million 2025 bond, which pays 5.95 per cent, saw spreads tighten to around 5,700 basis points on Wednesday (Dec 7), from above 12,000 points over comparable US Treasuries on Nov 28.

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Even at these levels, the 2025 bond trades at spreads 10 times the levels of mid-2021. While yields have fallen from 115 per cent to 70 per cent, they are a long way from the 5 per cent yield early in 2021.

Meanwhile, foreign investors stayed away.

Alessandro Zhu, Asia fixed-income portfolio manager at CSOP Asset Management, said: “It remains challenging for Chinese property bond issuers to attract a sustained period of inflow like they did in the past.”

“There is not enough fundamental data to attract significant allocation from global asset managers.”

Data from Morningstar showed that China bond funds denominated in foreign currencies drew just US$20.06 million for the first 11 months of this year, after seeing outflows in 2021.

Asia-Pacific high-yield US dollar bond funds witnessed outflows of US$2.45 billion from January to November 2022, after inflows of US$11.33 billion in the same period last year.

Mainland property sales remained weak in October, as prices in 100 cities dropped for a fourth month.

Chinese bonds comprise a quarter of emerging market offshore corporate bonds. The ICE BofA China high-yield US dollar index returned 11 per cent so far this month, while the China investment grade index returned almost flat.

Country Garden’s US$1 billion 2025 bond, which pays 3.125 per cent, surged to 55 cents on the dollar, from less than 10 cents in November. This came after the developer said it would raise capital through a share placement, to refinance offshore debt.

The rally is expected to be bumpy. Analysts at Citi said they expect further defaults, particularly among those rated lower than single-B. Credit rating agencies define high-yield bonds as those rated below “BBB-“ or “Baa3“.

But “as China begins to more fully reopen, the recovery in sales could have better prospects,” they noted. REUTERS