Investors shy away as yields fall
Observers have pointed to a plunge in China’s offshore property bonds, which constitute a large proportion of the country’s previously rewarding dollar-denominated, high-yield debt market.
The bonds plunged as Beijing cracked down on property speculation last year, which meant dozens of local developers defaulted on interest and principal payments. The difference between a hawkish US Federal Reserve, which has lifted interest rates five times this year, and a dovish People’s Bank of China that is under pressure to relax monetary policy to rescue the sluggish economy, have affected yields and sales. Investors have raced to ditch Chinese bonds in exchange for better-yielding assets.
Global bond investors are re-evaluating their China lines in the shadow of the country’s unpredictable outlook, which is being weighed down by Beijing’s zero-Covid policy and intervention in the private sector.
The Mechanics
Public records show China’s offshore dollar bonds — those issued by local businesses in Hong Kong — fell by more than a third in the first nine months of 2022 compared with a year earlier, according to the Financial Times.
The picture is also gloomy for the onshore market — for renminbi-based debt issued in Shanghai — as international financiers have severed holdings in China’s interbank bond market for a straight seven months since February.
Experts estimate China’s homegrown debt market has recorded an outflow of about USD $80bn since the beginning of this year, reversing a “significant” proportion of inflows from before.
More than two-thirds of the dollar bonds issued by Chinese developers are trading below 70 cents on the dollar as Beijing cut lending to developers and put restrictions on home purchases, causing a spike in defaults. That suggests investors have priced in more than $130bn in losses from holding these debt instruments.
The state of the State
The Chinese government has announced a raft of new plans — from cutting mortgage rates to easing purchase restrictions — in an attempt to save the property market, which accounts for a third of China’s economic output. But its efforts have sso far fallen far short of rejuvenating the industry.
What happens next?
The five largest Asian high-yield bond funds slimmed down their holdings in Chinese developers to 16.4% in June from 27.6% last December. A weakening Chinese currency, which has lost 11% against the US dollar since the beginning of this year, has added another layer of anxiety to western consumers of onshore bonds.
But, in spite of the sombre mood, many investors still see Chinese bonds as an indispensable part of their portfolio, with many analysts saying that when global markets are selling off, China can still be relatively stable.
Our take
The unique make-up of the Chinese bond market — illustrated by serious state manipulation that has led to much of the real estate turmoil — has also made investors wary of risks that traditional models cannot predict.
For the observant investor, seeing whether the loosening of Chinese bonds from the rest of the world could make them riskier in the long run or not..