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Liquidity warning on China property bond issuers

Investors are likely to differentiate further between high and low quality China property bonds following the recent restrictions on offshore issuance.

Tougher regulations on offshore bond issuance will strain the liquidity of Chinese property developers, and widen credit differentiation among individual developers, according to a report by Moody’s Investor Services, released today.

Earlier this month, China’s National Development and Reform Commission imposed new limits on the issuance of offshore bonds from property developers.

“Developers with stronger credit profiles and liquidity will likely gain marketshare from their weaker peers,” said Celine Yang, a Moody’s assistant vice president, in a statement.

Recent research by Last Word Media found that over the next 12 months fund selectors in Asia will be keen buyers of Asian bonds denominated in G3 currencies, which is a sector dominated by China property issues.

In fact, fixed income funds accounted for 66.1% of total gross funds sales in Hong Kong, for the year to the end of April, compared with just 22.5% during the second quarter of 2018, according to the Hong Kong Investment Funds association.

However, several emerging market and Asia bond fund managers have already insisted on the need to differentiate between leading China property companies and weaker firms as the Sino-US trade dispute continues to threaten Chinese economic growth.

Alejandro Arevalo, who manages two emerging market fixed income products at Jupiter Asset Management, told FSA that although real estate is “very stable”, he is focused on the companies “that will be the consolidators in the industry”.

Tiansi Wang, senior credit analyst at Robeco, told FSA at the start of July that she favoured “high quality” China offshore bonds, as does Ken Peng, head of Asian investment strategy at Citi Private Bank.

Tai Hui, Hong Kong-based strategist at JP Morgan Asset Management, warned that some Chinese corporate bonds had balance sheets with “very high risks” – which would be exacerbated if their offshore funding sources were choked.

Refinancing requirements for  Chinese developers remain high, with around $34.8bn of onshore bonds and $19.1bn of offshore bonds set to mature or become subject to put options over the 12 months, according to Moody’s.

“Small and weaker single-B rated developers will face higher refinancing risks, given their weaker access to funding,” the credit rating agency noted.

The best performing RMB fixed income funds over the past three years – such as those managed by Income Partners , BEA Union Investment and BOCHK – have been heavily weighted in US dollar denominated China property issues.

But even they have struggled during the past few months. Investors turned risk-averse following a worsening of trade tensions and an inversion of the US Treasury bond yield curve, which raised concerns that an economic slowdown might turn into a recession.


Relative returns of China and Asia-Pacific fixed income funds

Source: FE Analytics. Three-year cumulative returns in US dollars

Part of the Bonhill Group.