Chinese real estate bonds offer high yields, for the brave

Residential and commercial buildings in Hong Kong.

ANTHONY WALLACE / AFP via Getty Images

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Tech stocks aren’t the only Chinese assets that have collapsed in recent times.

Spreads on B-rated corporate bonds, which move in the opposite direction of price, have jumped seven percentage points over the past month, said Paul Lukaszewski, head of Asia-Pacific corporate debt at Aberdeen Standard Investments.

The three-year-old paper pays around 18% interest, higher than during most of last year’s Covid-19 panic. the

Kraneshares CCBS China Corporate High Yield Bond USD Index

The exchange-traded fund (ticker: KCCB) is down 1.5% in the past two weeks, a drop from fixed income standards.

“Outside of Asia, the credit markets are priced perfectly,” says Lukaszewski. “In China, this is the price of a collapse.”

It can mean a golden opportunity in a world lacking in returns. Or things could get even worse before they get better.

Real estate developers are at the heart of the Chinese corporate bond market and its problems. About 80 of them issued hard currency debt worth around $ 200 billion. Maintaining stable housing prices, which supplies nearly 30% of the economy, is a constant concern of the Chinese authorities.

This year, they tightened credit sharply and established “three red lines” for builders’ debt ratios. “They are trying to block the financial channel for developers,” says Tracy Chen, portfolio manager for global credit at Brandywine Global.

This sows fear in a market that is not the most transparent in the world. “One developer is punished for having bought too much land while another bought too little,” explains Lukaszewski. “Investors invent reasons to sell. “

The problems of a business are very real:

Evergrande Group in China

(3333.Hong Kong), No. 2 manufacturer in China and No. 1 worldwide in leverage. He gave up assets and quickly sold apartments to raise funds to meet Red Line goals. The rating agency Fitch still downgraded Evergrande from B + to B on June 22. Some of its Chinese banks have reportedly cut it off.

A bailout of Evergrande would boost the rest of the market, predicts Omotunde Lawal, head of emerging market corporate debt at Barings.

“Evergrande is probably too big to fail,” she says. “I am in the camp that there is value at current prices.”

Nonetheless, it focuses on stronger, BB rated companies like

CIFI Holdings Group

(884.Hong Kong) or

Shimao group holdings

(813.Hong Kong), whose short-term bonds are earning around 5%, not double digits.

Samy Muaddi, Senior Manager for Emerging Market Corporate Bonds at

Price T. Rowe,

thinks Beijing could let Evergrande and up to a dozen others default. “I was a contrarian buyer of Chinese credit in previous cycles,” he says. “This time, they are determined to eliminate moral hazard.

What’s too big to fail is the Chinese real estate industry as a whole. Xi Jinping & Co. wants to keep a floor below existing owners at least a ceiling for aspirants, and constantly adjust credit accordingly.

The State Council, the Chinese equivalent of a cabinet, may have signaled the next conciliatory tilt on July 8.

It deserves a close watch, at least for hungry bond investors.

“We didn’t bet the farm on Chinese developers,” says Lukaszewski of Aberdeen. “But we are long and add because the risk / reward ratio is so favorable.”


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Adam Gray

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