Chinese Property Bond Rally Fades as Investors Seek Clarity

China Property Bond Crash Morphs Into Epic Rally on Easing Bets

A record-breaking rally in Chinese property bonds petered out on Thursday amid growing investor doubt over how much a reported plan to allow developers greater access to funds from presold homes will benefit distressed firms.

High yield notes fell as much as 3 cents on the dollar after jumping Wednesday following the reports. Bonds of Country Garden Holdings Co. declined after having rallied by a record the previous day. Gains extended in the stock market, with an index of developer shares rising 3.6% as traders cited short covering.

With a crisis of confidence and financial contagion spreading across the property market this week, investors are looking for regulatory easing to help a credit market that’s saddled with billions of dollars in losses. Thursday’s reversal in bonds shows traders are wary of betting too strongly that the news marks a turning point for the beaten-down sector.

“The market is still cynical about [the reported rule] being nationwide,” said Monica Hsiao, founder and chief investment officer of Triada Capital. “In reality we know a lot of implementations get done province by province and also we do not know details of which types of company will be allowed more access.”

Chinese Property Bond Rally Fades as Investors Seek Clarity

Chinese regulators are considering lifting some restrictions on developers’ access to cash tied up in escrow accounts, people with knowledge of the matter said Wednesday. The plan, which was earlier reported by Reuters, would potentially be a major step toward easing the industry’s liquidity crunch because such cash generally accounts for almost half of developers’ inflows.

A number of major cities in China and some smaller municipalities tightened supervision over the use of presold property proceeds at the end of last year, local media reported at the time. 

Generating liquidity by other means has become increasingly difficult. Home sales and prices are dropping, and several of China’s largest banks have become more selective about funding real estate projects by local government financing vehicles. 

Market-oriented funding channels have been all but paralyzed. Selling credit offshore is prohibitively expensive and the equity market can only digest so much -- when Sunac China Holdings Ltd. tapped stock investors instead last week, its shares sank a record 23% in Hong Kong.

“The challenges will persist until there is clear evidence that most issuers have access to numerous sources of funding, including the offshore dollar bond market,” said Charles Macgregor, head of Asia at Lucror Analytics.

Even as China cut interest rates this week and pledged to use more monetary tools to support the economy, authorities haven’t shifted their rhetoric on housing. In a press briefing Tuesday, officials at the People’s Bank of China said mortgage loans would be kept “basically stable.” Policy makers also reiterated the oft-repeated catchphrase that houses are for living in, not for speculation. Thursday’s cut in the five-year loan prime rate, which underpins mortgages, was smaller than some economists had expected.

Country Garden’s 6.5% note due 2024 fell 1 cent on the dollar to 91 cents, after surging nearly 14 cents a day earlier, according to data compiled by Bloomberg. Sunac’s 6.5% note due 2023 was trading at around 61 cents Thursday after peaking at 69.6 cents, according to data compiled by Bloomberg. 

Closing Positions

In the stock market, short-seller favorite Agile Group Holdings Ltd. surged 13% on Wednesday, the most since 2015. It gained another 5.3% on Thursday.

An event-driven fund was among those caught by Wednesday’s sudden rally in Chinese property stocks, according to a Singapore-based money manager who asked to not be named discussing internal trading strategies. The fund started closing some of its short positions Wednesday afternoon. Another trader at a global bank said two clients were buying Chinese property shares to close out short bets on Thursday.

“We are short China property shares and have been since 2020,” said Daniel Yu, founder of Gotham City Research LLC. “We were expecting some policy moves but you just adjust positions along the way. This doesn’t change the long-term picture. We are sticking with our positions, hedging them by buying other China names.”

Workers Wages

While access to funding is key, it’s not the only challenge facing property developers, who have a wall of upcoming maturities to contend with. Offshore bondholders are unlikely to be the priority when Beijing’s focus is ensuring homes are delivered and wages are paid to migrant workers before the Lunar New Year holiday.

Others are more optimistic.

A relaxation of presales restrictions “could be the biggest and arguably most important easing measure towards the property sector so far,” said CreditSights analyst Zerlina Zeng.

“This is exactly what we were hoping for,” said Jean-Louis Nakamura, chief investment officer of Lombard Odier Asia Pacific. “Bringing back some calm, discrimination and sustainable stability -- or improvement of spreads at least of high quality developers -- would already be significant progress.”

Increase Holdings

Firms including Allianz Global Investors, Axa Investment Managers and Oaktree Capital Group have said in recent months that they’re looking to increase their holdings of beaten-down real estate debt. Jason Brown, a former Goldman Sachs Group Inc. special situations group head, raised an initial $245 million last month for his Arkkan Capital to invest in Chinese distressed property loans and bonds.

A top-performing Chinese money manager said earlier in January he was buying dollar bonds of the country’s developers, betting authorities would soon unleash measures to support the industry.

Still, the turbulence in China’s financial markets is putting renewed pressure on Xi Jinping’s government to do more. China’s securities watchdog recently pledged to “firmly” prevent market volatility. The Communist Party’s top decision makers vowed last month to ensure stability in the economy in 2022. 

©2022 Bloomberg L.P.