NEW YORK - China's real estate sector will likely see a lot of easing in the policies that govern it, BNP Paribas Asset Management said, months after starting to build a long position in that sector's debt.
Jean Charles Sambor, head of emerging market fixed income at the BNP Paribas Asset Management BNPPAM in London, said that we are at a major inflection point in terms of policy and we are likely to see some significant easing.
We are positive in the sector and we are involved in it. We have built this position over the last couple of months. Sambor could only talk about company-specific investments, not the general sector.
Last year, Chinese real estate sector assets came under a lot of pressure after stricter financing rules for property development in 2020 met with a mountain of debt, effectively engineering a contraction. The outsized importance of China's real estate in the global economy sent shivers down many portfolio managers' backs.
In the midst of a restructuring, the CSI China Mainland Real Estate Index fell by as much as 28 per cent last year before closing down 15 per cent, with the stocks in China Evergrande, one of the biggest developers, down 89 per cent in 2021.
Evergrande has around $300 billion in liabilities, including about $20 billion in international bonds. The foreign bonds, which traded above 90 cents last year, are now at default levels, at under 20 cents on the dollar.
The property market was under pressure because the government wanted to deleverage and to some extent they achieved that, Sambor said. Now China wants to make sure that the rest of the sector is not at risk. Some international investors think state-owned enterprises are SOEs to help smooth debt restructurings, but others worry it could open the door for Beijing to use limited returns to pay its local debts first.
Sambor said that a sector restructuring cannot be led by the state because private sector involvement in the property market is very large.
SOEs are a significant part of the market but are not dominating it, making it hard for them to engineer an SOE-lead restructuring. He said that you need strong participation from the private sector.
Sambor said that the BNPPAM's view on the real estate sector is part of a wider bet on fixed income returns within emerging markets.
Sambor said that the year is going to be the year of great normalisation in Asia, with a focus on China. In 2022, the Asian high yield, and China, will be a key driver of EM fixed income performance.