Bonds issued by China’s highly indebted real estate developers have rebounded sharply over the past two months, in a sign that efforts by Chinese authorities to bolster the hard-hit sector are bearing fruit.
China’s high-yield dollar bond index, which is dominated by the property developers at the heart of a market meltdown over the past two years, has recovered almost 50 per cent from the record low hit in early November. Bonds from higher-quality developers such as Country Garden have also recovered from distressed territory to trade close to their original value.
Foreign investors, who quit the market for developer bonds en masse during a crackdown by Beijing on excessive leverage in the sector, have tentatively begun to return, market participants say.
“Over the last couple of months we’ve seen relaxation [of lending restrictions], supportive policies from the Chinese government towards the real estate sector, the opening up of the Chinese economy, and doing away with zero-Covid,” said a Hong Kong-based debt capital markets banker with a European lender. “All of these combined have changed the [market’s] view on China and also dramatically improved sentiment towards Chinese property names.”
Bankers say that many bond investors remain wary, with much of the buying being done by hedge funds and private banks. And the rebound in confidence is far from universal, as bonds from developers who have already defaulted — such as China Evergrande, which has repeatedly missed restructuring deadlines — have still shown little to no pick-up.
Beijing in recent weeks has backpedalled on its longstanding “three red lines” policy — targets for debt, equity and assets intended to limit leverage in the property sector, which had long served as a warning to banks against lending too freely to developers.
But authorities’ approach to the sector was already changing in the final months of 2022, helping property companies secure new financing. China’s 100 largest property developers raised more than Rmb100bn from new loans, bonds and equity — reflecting a year-on-year jump of more than a third — with the bulk coming from domestic sources.
There are also tentative signs that the freeze in international bond markets may be thawing slightly. Developer Dalian Wanda sold its first dollar bond in over a year earlier this month raising $400mn to help refinance some of its existing debt load.
A banker on the deal said it had drawn more than $1.4bn of orders from investors, but added that even just two or three more similarly sized dollar bond sales from developers this quarter “would be a good outcome . . . because honestly, we don’t think that a lot of them can come [to market]”.
The scale of the problem faced by both Beijing and China’s property groups remains stark. The latest data show housing sales in the fourth quarter of 2022 fell more than 28 per cent year on year, marking the sixth straight quarter of declines.
It remains to be seen whether Beijing’s efforts to jump-start stalled development projects across the country can resolve a crisis of confidence among homebuyers no longer convinced that payment for an under-construction unit guarantees delivery of a finished apartment.
And even if there is a serious rebound in demand, it will take time for international investors’ appetite for developer debt to return in full. China Evergrande, in particular, still faces major hurdles to restructuring, including the recent departure of its auditor PwC over different views on financial statements being investigated by Hong Kong regulators.
“It will be years until [foreign] investors are no longer worried about China’s property sector,” said the head of institutional sales for Asia at one European lender.
