Bond investors wary of China property market
Investors have cited concerns about the impact a weakening renminbi might have on the growing amount of US dollar debt being issued by Chinese property firms amid a market slowdown.
In the seven months to this July, Chinese property firms issued $8.6 billion of investment grade bonds in dollars, more than double the $3.3 billion they issued over the same period in 2013, according to Dealogic.
The number of cities in which residential property prices have fallen increased to 64 out of China’s 70 largest cities in July, from 35 in May and 55 in June, according to official numbers. The July numbers are the worst since Beijing started collecting the data in 2005.
Because the new debt is in dollars, it is vulnerable to weakening of the renminbi. Unlike a Chinese firm selling coal to US clients for dollars, for instance, Chinese property firms are reliant on revenues in local currency. If Beijing weakened its currency it would not be the first time.
Edwin Gutierrez, fixed income portfolio manager at Aberdeen Asset Management, is not concerned about the spike in new issuance in itself because he says the majority has been from high-quality firms that are gaining market share and are well-placed to afford it.
But he is underweight US dollar corporate debt in the region and fears the renminbi could weaken in the coming months which, he accepts, would make it costlier to service new debt. “There will be further pressure on the currency, which would make it harder for these firms to service their dollar payments,” Gutierrez says.
Jim Barrineau, co-head of emerging market debt relative at Schroder Investment Management, also has anxieties about the ability of the renminbi to support yields on dollar-based bonds.
Its gains so far this year have led him to shun dollar-denominated emerging market debt in the region in general. “The renminbi appreciated from 625 to 617 against the dollar between July and August,” he notes.
“The move has carried with it Malaysia and Thailand, big exporters to the mainland, who have also seen their currencies strengthen.”
With an average bond yield of only 3.5% across Asia today, currency strengthening is crucial to allocations. Barrineau can’t see it providing significant gains from here.
Peter Eerdmans, co-head of emerging market debt at Investec Asset Management, acknowledges there are risks to investors in US dollar bonds from Chinese property firms.
“It’s true that this sector was cheaply priced and it has now rallied,” he says. “Certainly there is a pressure from inventory that has risen and prices that have fallen.”
He says he is wary of an increase in the share of US dollar issuance in the corporate sector in emerging markets in general. “You must make a detailed call with a corporate bond manager and examine sensitivity to currency – firms that export a lot are at an advantage,” he states.
But Eerdmans doesn’t feel the mismatch between renminbi revenues and dollar interest payments is a threat to the big new pool of US dollar bonds issued by Chinese property firms this year, partly as they have already weathered renminbi weakening earlier in the year.
“It’s true that these firms don’t have US dollar revenue but we’re not that concerned about the currency mismatch as our views on the renminbi are moderately positive,” he says. “Even when Beijing let the renminbi weaken as a policy to shut out the carry trades earlier in the year, the move was relatively small, not really impacting these firms' ability to pay.”
Eerdmans believes the renminbi-dollar rate will go in a direction that favours, rather than punishes, property firms which have issued new dollar debt. “In fact, we expect it to strengthen slightly. We don’t anticipate a large 5-10% weakening in the renminbi that could make [the currency mismatch] a problem,” he adds.