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Chinese property bonds' time in the sun may end soon


CHINESE developer bonds' healthy run may be coming to an end.

Notes sold by home builders topped 10 other sectors in Asia in the first half, a Bank of Merrill Lynch (BAML) index showed, as investors were lured by a relaxation of property curbs and easier liquidity for real-estate firms.

Yet, fund managers say those gains may be short-lived, with both factors now being dialled back.

Since May, top policymakers have sought to limit almost every financing avenue for developers to ensure they cannot buy land at inflated prices and spark a property bubble.

Home-buying restrictions have also been widened.

That means bond investors will have to be more discerning, particularly when it comes to smaller developers, many of which are facing looming maturity walls.

"I don't expect developers' net bond prices to keep surging," said Gary Zhou, the Hong Kong-based head of fixed income at Dongxing Securities. "We have started to play defensive: turn to those with shorter tenors or higher ratings, or simply buy less."

Chinese high-yield US dollar notes, most of which have been sold by developers, returned 10.3 per cent in the first six months of 2019, the best two consecutive quarters since 2012, a BAML index showed.

The solid performance followed a largely lacklustre 2018. Buyer interest revved up in the final months of the year following central bank liquidity injections.

The landscape is now changing after Beijing earlier this month announced fresh restrictions on foreign-debt sales, allowing firms only to refinance if their offshore notes mature in one year.

Limitations have also been placed on onshore bonds and trust financing, an important shadow-banking channel.

Outside of developer financing, some home builders have been told they are pricing new projects too expensively, and some banks have been told they are offering home buyers mortgages that are too cheap.

All up, 251 property-policy tweaks were unveiled in the first half, according to Centaline.

It could not have come at a worse time for developers with weaker credit profiles, most of which tend to be smaller in size too.

Those rated AA+ or below face an US$8.7 billion maturity wall in the third quarter.

A unit of Fuzhou-based Tahoe Group paid investors 15 per cent for three-year money last month and in May offloaded stakes in some residential projects to Shimao Property Holdings. Those US$400 million of notes due 2022 are now yielding 17.2 per cent.

China Evergrande Group's 8.75 per cent of bonds due 2025 are the second-worst performers on the BAML index this month, while securities sold by Future Land Development Holdings have not fared well either following the arrest of controlling shareholder Wang Zhenhua.

Dollar notes due 2022 sold by China South City Holdings, a developer focused on commercial property and thus less affected by residential tightening, topped peers, gaining 4 per cent.

"The challenging funding environment may throw some builders' expansion plans into a mess," said CCB International Holdings analyst Siu Fung Lung. "It's worth avoiding small developers and waiting for more certainty." BLOOMBERG