BlackRock among investors to pare losing China property bets

[HONG KONG] The biggest investors in China's junk property bonds reduced their exposure for the first time in months, a turning point after they previously doubled down through distress and default risks.

Institutional investors which publicly file their holdings trimmed exposure in March after adding US$3.7 billion of dollar bonds in par value terms between early November and the end of February, according to Bloomberg data. BlackRock cut US$370 million last month to bring the value of its holdings - if calculated at par - to just under US$5 billion.

A BlackRock spokesperson declined to comment on company holdings.

The move underscores how even long-term supporters of China's beaten-down property bonds may be losing enthusiasm for bargain hunting.

While policymaker vows for broader market support helped spark a rally in junk dollar bonds - most of which are from developers - from mid-March, the securities still lost about 18.6 per cent last quarter in the worst tumble in more than a decade. That came amid a wider global bond sell-off, as central banks look to tighten policy to combat surging inflation.

The total size of managers' holdings and the calculated change are approximate due to different filing dates and varying rules on how funds in different countries disclose holdings.

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Positive flows for the biggest 20 asset managers in Asia credit reversed in March after gaining since last June, according to Hayden Briscoe, head of Asia-Pacific fixed income at UBS Group's US$1.2 trillion asset management unit. China high yield credit saw outflows alongside the rest of the world, Briscoe said.

Withdrawals are also making their mark at a BlackRock exchange traded fund (ETF). Outflows last month deepened to a record for the iShares USD Asia High Yield Bond Index ETF, with US$2.3 billion under management as of Mar 31, which has exposure to Chinese real estate debt.

"Investor confidence, rather than the fundamentals, is the key to watch for the China high yield sector," said Swa Wu, senior fixed income specialist at JPMorgan Chase & Co's asset management unit. It is only when investor confidence improves that capital will return - "that's when we will consider adding to our positions".

China is moving to stem financial risk ranging from hundreds of weak rural banks to dozens of distressed developers saddled with at least US$1 trillion of liabilities. The nation's authorities are considering a plan to raise several hundred billion yuan for a new fund to backstop troubled financial firms, according to people familiar with the matter last week.

Still, such support may not come quickly enough for global investors that hold distressed builder notes. "The market is running out of time and running out of steam. A lot of investors have been caught by surprise over the past couple of months," Tam Chun-Him, head of Asia fixed income and currencies at RBC Wealth Management said by phone. "If you exit now, there's zero upside, but at the same time there are no triggers for improvement."

A gauge of Chinese high-yield debt, which was close to par a year ago, has over 50 per cent of its members trading below 30 US cents as of the end of March.

Details of concrete measures to ease stress in the beleaguered property market have yet to emerge, as sales continue to slump and key financing channels remain shut to most developers.

BlackRock's Asian High Yield Bond Fund lost 26 per cent over the last 12 months. The Fidelity China High Yield Fund has lost 28 per cent over the same time period. A UBS China High Yield Fund, managed by Briscoe, is down 46 per cent. For all 3, 2021 was the worst calendar year for performance since inception.

Money managers seeking bargains face a string of risks. More Chinese developers are likely to resort to measures such as debt extensions and exchange offers in the next few months to avoid a wall of debt maturities, said Vanessa Chan, investment director at Fidelity International.

Volatility and uncertainty will persist in the short and medium term, she cautioned. "If you look across our top 20 competitors, almost everyone is underperforming the benchmark, which means they are still overweight" in China junk property debt, Briscoe said. BLOOMBERG