The Chinese property developers have been showing signs of a rebound after Beijing took measures to support the cash-strapped sector, but long-term investors are keeping away until they see signs of a deeper recovery.
High yield dollar-denominated bonds of companies such as Powerlong Real Estate Holdings and Country Garden Holdings have rallied since late November, cheered by the Chinese central bank and banking regulators 16 steps to support the ailing sector.
The measures, including loan repayment holidays, have instilled hopes that the regulatory squeeze and liquidity crunch that have plagued the industry since mid- 2020.
The rally has been limited to a handful of bonds whose issuers announced plans to boost their capital. Foreign investors are staying away.
Alessandro Zhu, Asia fixed income portfolio manager at CSOP Asset Management said that it was difficult for Chinese property bond issuers to attract a sustained period of inflow like they did in the past. There isn't enough fundamental data to attract significant allocation from global asset managers. The prices on Powerlong Real Estate Holdings dollar bonds have rallied in the days after the steps were announced, particularly after sources told Reuters China's central bank will offer cheap loans to financial firms to buy bonds.
Powerlong has signed an agreement with the Shanghai Rural Commercial Bank for a 5 billion yuan $716.69 million credit line.
Even at these levels, bond trades at spreads 10 times more than the levels seen in mid- 2021, and while yields have fallen from 115 per cent to 70 per cent, they are a long way from the 5 per cent yield early in 2021.
After seeing outflows in 2021, China bond funds in foreign currency drew just $20.06 million for the 11 months this year, according to Morningstar.
In January to November 2022, Asia Pacific high yield dollar bond funds saw outflows of $2.45 billion, compared to $11.33 billion in the same period last year.
Mainland property sales fell for a fourth month in October, as prices in 100 cities dropped for a fourth month.
Chinese bonds comprise a quarter of the emerging market's offshore bonds. The ICE BofA China high-yield dollar index returned 11 per cent this month, compared with an almost flat return on the China investment grade index.
Country Garden Holdings has seen the price of its $1 billion 2025 dollar bond, which pays 3.125 per cent coupon, go up to 55 cents on the dollar from less than 10 cents in November, after the developer said it planned to raise capital through a share placement to refinance offshore debt.
The rally is expected to be bumpy, with analysts at Citi expecting further defaults, particularly among those rated lower than single-B. Credit rating agencies define high-yield bonds as those rated below BBB or Baa 3 but as China starts to reopen, the recovery in sales could have better prospects, Citi said.