- According to Bloomberg data, two-thirds of the more than 500 outstanding dollar bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for “distressed” status.
- Almost all Chinese real estate groups have been frozen out of the international bond market, further constraining their ability to refinance and increasing the risk of default, which weighs on demand for existing bonds as well.
There was a time when investors couldn’t get enough of Chinese bonds.
A booming economy, a growing middle class and the world’s second largest economy that was coming into its own, China’s ascendency was almost a given and investors were lining up to cash in on the opportunity.
But a year after China’s Evergrande Group, the world’s most heavily indebted developer, began spiralling into default, contagion has spread to the broader market and many Chinese developer bonds are now priced at levels that imply a very high risk of default.
With mounting worries China’s housing market will face a protracted crisis unless Beijing steps in with a large-scale bailout, markets have priced in almost US$130 billion in losses on Chinese property developer dollar-denominated debt.
Not helping matters is that when some Chinese developers headed towards default, there appeared to be a preference to pay onshore debt ahead of offshore, dollar-denominated debt.
According to Bloomberg data, two-thirds of the more than 500 outstanding dollar bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for “distressed” status.
And even at these prices, it’s not that easy to find buyers.
While some Wall Street banks and hedge funds have been picking up Chinese developer debt, the trade isn’t for the faint-hearted.
Rising geopolitical tensions between Beijing and Washington, a worsening property crisis and zero-Covid lockdowns which have stymied consumer confidence and demand are all raising prickly questions as to how China emerges from a crisis of its own making.
Data from Dealogic suggests that issuance of dollar bonds by developers has fallen 80 per cent during the year to date to just US$7.2 billion, on track towards the lowest level of annual sales in a decade.
Almost all Chinese real estate groups have been frozen out of the international bond market, further constraining their ability to refinance and increasing the risk of default, which weighs on demand for existing bonds as well.
Official figures show China’s home sales fell nearly 30% in the first half of the year to about US$960 million, and the recent wave of homebuyers withholding payment on their mortgages for uncompleted properties means that investors snapping up Chinese real estate developer bonds at pennies on the dollar risk catching falling knives.
This week, Chinese policymakers cut the key mortgage lending rate, to demonstrate their seriousness when it comes to dealing with the crisis, a major move considering that previous measures had been incremental.
But Beijing’s refusal to launch a comprehensive bailout may only add to the ultimate cost of rescuing the real estate industry and could worsen the fallout for global markets and trade as Chinese growth grinds slower.
China’s real estate market contributes 29% to the country’s GDP and responsible for around 70% of the economy through its ancillary effect across a slew of industries.
Everything from furniture manufacture to construction materials, durable goods and plastics, all indirectly rely on demand to furnish and fit out new homes in China’s massive cities.
