Bonds issued by highly indebted Chinese property developers have rebounded strongly over the past two months, a sign that Chinese authorities’ efforts to support the hard-hit sector are bearing fruit.
China’s high-yield dollar bond index, which has been dominated by property developers amid a market meltdown over the past two years, has recovered nearly 50% from its all-time high reached in early November. Bonds from higher quality developers such as Country Garden also recovered from struggling territory to trade near their original value.
Foreign investors, who left the developer bond market en masse during a Beijing crackdown on excessive leverage in the sector, have tentatively started to return, market participants said.
“Over the past two months, we have seen a relaxation [of lending restrictions], the Chinese government’s supportive policies towards the real estate sector, the opening up of the Chinese economy and the suppression of zero-Covid,” a Hong Kong-based debt capital markets banker told Reuters. a European lender. “All of these elements combined have changed the [market’s] view of China and also greatly improved sentiment towards Chinese property names.
Bankers say many bond investors remain wary, with most buying being made by hedge funds and private banks. And the rebound in confidence is far from universal, as bonds from developers that have already defaulted — like China Evergrande, which has repeatedly missed restructuring deadlines — have yet to show little or no recovery.
In recent weeks, Beijing has backtracked on its longstanding policy of “three red lines” – debt, equity and asset targets intended to limit leverage in the real estate sector, which had long served as a warning to banks against lending too freely to developers.
But the authorities’ approach to the sector was already changing in the final months of 2022, helping property companies secure new funding. China’s top 100 real estate developers raised more than 100 billion yuan through new loans, bonds and stocks, representing a year-on-year jump of more than a third, with most of it coming from national 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 more than a year earlier this month, raising $400 million to help refinance some of its existing debt.
A banker involved in the deal said it attracted more than $1.4 billion in investor orders, but added that even just two or three sales of similarly sized dollar bonds from developers this quarter “would be a good result . . . because honestly, we don’t think many of them can come [to market].”
The scale of the problem facing both Beijing and Chinese real estate groups remains considerable. The latest data shows that home sales in the fourth quarter of 2022 fell more than 28% year-on-year, marking the sixth consecutive quarter of decline.
It remains to be seen whether Beijing’s efforts to revive stalled development projects across the country can resolve a crisis of confidence among homebuyers who are no longer convinced that paying for a unit under construction guarantees the 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 fully return. China Evergrande, in particular, still faces major restructuring hurdles, including the recent departure of its auditor PwC due to differing views on financial statements being reviewed by Hong Kong regulators.
“It will take years before [foreign] investors are no longer worried about the Chinese real estate sector,” said the head of institutional sales for Asia at a European lender.
