(Bloomberg) — A worsening crisis in China’s property market is dragging junk dollar bonds from the nation’s borrowers deeper into distress, as the implosion of what was once one of the world’s most-profitable bond trades sends ripples across trading floors.
Anyone who had been expecting a market turnaround from the 20th Communist Party congress which started Sunday has been left grappling with a further grind lower in China’s offshore credit market this week. President Xi Jinping gave few signals of any major changes regarding housing market policies and Covid rules that have also hampered the sector.
Average prices of the securities, dominated by real estate firms, dropped 1-2 cents Tuesday to a record low below 56 cents. Chinese high-yield notes have now suffered a record drawdown of more than 55% from a peak in 2021.
The rout underscores the challenges Chinese authorities face as they try to balance long-term efforts to wean the property market of excessive debt, while preventing a more severe downturn in the industry that accounts for about a fifth of the economy.
“The only way out is to have a heavy government involvement – for local governments to buy assets from private developers, for instance,” Raymond Yeung, chief Greater China economist at ANZ Bank, told Bloomberg TV Tuesday.
In a sign that policy steps are increasingly meeting with trader skepticism, the latest declines came despite fresh signals of an important expansion of a government program to help shore up liquidity.
For the first time, developers among a small group to issue local bonds with state guarantees under a program that emerged in August are coming back with more such planned offerings. Seazen Holdings Co., which has residential and commercial projects in more than 100 cities, plans to issue as much as 1.5 billion yuan ($208 million) of such notes. Country Garden Holdings Co. and Longfor Group Holdings Ltd. are also planning offerings under the program.
The scheme’s emergence in August sent shares and dollar bonds surging. But the rally faded within weeks and investors have since been watching for signs of further help, especially as one developer that recently sold state-guaranteed notes failed to make a debt payment this month.
“This type of issuance will likely be repeated as a gesture of support from policymakers, but it will offer limited help to builders’ financials and investor confidence,” given the issuance sizes are small compared with builders’ liquidity gap, said Iris Chen, a credit desk analyst at Nomura International HK Ltd.
Chinese high-yield dollar bonds are now into their second year of losses, contrasting with their average returns of about 9% annually from 2010 through 2020. In the golden days, institutions like Credit Suisse Group AG and Goldman Sachs Group Inc. brought international money flooding into an asset class where the gains stood out in a world desperate for yield and where defaults were extremely rare.
That all began to unravel after a nationwide clampdown on leverage and real estate speculation that started in 2020. It’s snowballed in the past year into record defaults by developers including property giant China Evergrande Group, and been exacerbated by a broader global selloff in fixed-income markets. Certain developers have left projects go unfinished, while some homebuyers have initiated unprecedented mortgage boycotts.
China, like other countries around the world, has been trying to guide down housing prices that had become prohibitively expensive for scores of city dwellers. Chinese authorities have also been seeking to wean markets from assumptions that borrowers would be bailed out. At the same time, they are trying to help stabilize the property market amid a persistent slump in home sales.
Financial regulators recently told the nation’s biggest state-owned banks to extend at least 600 billion yuan of net financing to the embattled property sector in the final four months of this year.
Recent developments have shown that even efforts the market had initially cheered aren’t by themselves enough to staunch the pain.
A case in point was Shanghai-based CIFI Holdings Group Co., which defaulted earlier this month when it failed to pay a coupon on a Hong Kong dollar convertible bond. That was particularly worrying because the firm was considered a barometer for the broader success of the state guarantees.
Chinese developers’ shares have also been suffering. A Bloomberg Intelligence gauge of the sector reached its lowest since January 2012 last week.
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Source: https://finance.yahoo.com/news/chinese-junk-bonds-set-record-003127896.html