Investors adopt a holding pattern on China's property-dominated high-yield bonds

Despite the high-level defaults, investors haven’t yet lost all confidence in China's high-yield bond market - especially those from property developers - but a selective approach will be essential.
Investors adopt a holding pattern on China's property-dominated high-yield bonds

Following the latest high-profile Evergrande Group default, investors are remaining underweight in Chinese property high-yield bonds - but only for now. Some are simply biding their time before adding selective names, analysts told AsianInvestor.

China high-yield bonds issuance slowed in the first half this year. However, the country, together with its property developer issuers, is still the main driver behind the Asia bond market where investors are still seeing a higher yield advantage. 

During the second quarter, China-based companies accounted for 71% ($5.7 billion) of rated debt in Asia as Chinese property developers continued to drive the majority of issuances with a 64% contribution, according to Moody's report published last month.

Lee Soo Cheon, SC Lowy

“The latest high-profile defaults in China did disturb the market appetite towards certain assets and we did see some of the China big-name high-yield bonds calm down a bit. But investors will see more differentiation between good companies and bad names,” Lee Soo Cheon, CIO at SC Lowy, told AsianInvestor.

“We should focus on whether those property developers can run their balance sheet well and how they continue their funding activities in the following months. But the volatility is set to continue in the second half,” he said, adding that the firm still planned to be overweight overall for the rest of the year in the Asia high-yield market given the price level and yield advantage.

Hong Kong-headquartered SC Lowy is a privately-owned global banking group that specialises in distressed and high-yield fixed income markets. 

Pheona Tang, BEA UI

For China high-yield property companies, investors should look closely at the government's deleveraging agenda which is producing opportunities and challenges in the sector, according to Pheona Tang, chief investment officer for fixed income at BEA Union Investment.

“We must be selective when choosing investments and engage in detailed bottom-up research on each name. We are more neutral on China property high-yield bonds for now given the latest concern over mounting defaults, but we do see attractive valuations adding to some high-quality property bonds,” she said. 


Stephen Chang, portfolio manager for Asia at PIMCO, also told AsianInvestor that investors should be selective and prudent on high-yield investment, going underweight Chinese property sector for now. 

Stephen Chang, PIMCO

“For property developers, we are focusing on tracking the funding refinancing capabilities, balance sheet vulnerability, cash flow from sales, and other related factors. At this moment, we are slightly underweight in the property sector. Tightening measures means that growth in the property sector is set to lag behind nominal GDP this year,” he said. 

A neutral position with a selective approach was also echoed by Paula Chan, senior managing director and senior portfolio manager for Asia fixed income at Manulife Investment Management.

Chan believes, although this sector has been under pressure from idiosyncratic events and China’s tightening policies, there are names within the sector that are well-diversified and have sufficiently strong credit fundamentals to withstand short-term market volatility.

“As the sector is beaten down, valuations may become even more attractive and it will be worth considering on a selective basis,” she said.


Zhang Shuncheng, associate director of corporate research at Fitch Ratings, told AsianInvestor that Chinese developers will see increasing refinancing risks given the regulators’ tightened bank loan channels since January. 

The government last year also drafted new financing rules for them under a "three red lines" policy, which not only capped borrowing limits but required enterprises to reduce their debt as soon as possible.

In terms of China high-yield bond issuances, the amount stood at $14.1 billion for the first half this year, which is below levels registered in the first half 2019 as well as the first half of 2020. 

Downgrade actions in the second quarter were largely related to the property sector, while around 71% of the China high-yield portfolio has a stable outlook, according to Moody’s.

Also read AsianInvestor's stories on China sovereign bonds and Asia fixed income market.

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