Investors reassess their exposure to junk bonds in Evergrande, China

Investors reassess their exposure to junk bonds in Evergrande, China

A Intelligence gauge of those stocks has jumped 4.6% since Thursday’s close, extending its gains to more than 30% since mid-March when officials vowed to support property firms. That beat a less-than-1% increase in China’s benchmark CSI 300 Index during the period. Funds Trim China’s Weaker Junk Bond Exposures and Reallocate China Property’s Trough Has Passed for Sales, Bonds: Barings China Property Rally Needs More Policy Aid to Last: Taking Stock.

According to Intelligence, investment managers may have taken advantage of the recent China junk bond liquidation by reallocating more of their money to better developers while reducing their holdings in weaker and more frequently held firms. Meanwhile, property stocks in China have risen as government officials signalled additional support, but analysts warn the rally may not last unless more concrete efforts are made to improve the sector’s sinking fundamentals.

Investment managers may have taken advantage of the recent China junk bond liquidation and reallocated more of their money to stronger developers such as Country Garden Holdings Co. and CIFI Holdings Group Co. while cutting their positions in weaker and widely-held names such as Shimao Group Holdings Ltd. and Kaisa Group Holdings Ltd., Intelligence said in a report. This may indicate there is underlying demand for stronger developer bonds, it added.

An average 57% slump in April-contracted sales for Chinese developers tracked by Bloomberg Intelligence suggests Covid-19 outbreaks and weaker economic outlook threaten to deepen the housing market slowdown and delay recovery for the sector’s liquidity, according to analyst Kristy Hung. Policy stimulus may do little to turn around near-term sales, with Agile Group Holdings Ltd., Shimao Group Holdings Ltd. and Sunac China Holdings Ltd. leading the plunge in April.

Country Garden Services Holdings Co. and other leading Chinese property managers could give their profit margins greater backbone by acquiring third-party projects, opening up powerful shortcuts to greater economies of scale, according to Bloomberg Intelligence Analyst Yan Chi Wong. China Resources Mixc Lifestyle Services Ltd. and Sunac Services Holdings Ltd. may seek a profitability boost by expanding their high-margin commercial operations.

“The trough has passed” for China’s property sector regarding both bond technicals and the physical market, even though broad policy support is unlikely and more defaults are possible, said Omotunde Lawal, Barings’ head of emerging-market corporate debt. Some pent-up housing demand could be released once Covid-related lockdowns end, she told Bloomberg. Meanwhile, comparisons will ease in coming months as sales declines started in mid-2021, she said.

Barings prefers in its portfolio large, national developers with diversified and low-cost landbanks as well as onshore/offshore access to the debt and equity capital markets, she said. Developer shares advanced after China’s top leaders in the Politburo last week called for the stable and healthy development of the property market, as part of a pledge to bolster an economy hit by the worst Covid outbreak since 2020.

But analysts are uncertain about how far leaders will go in aiding the sector. One thing policy makers could do is to ease requirements that firms keep some of their pre-sales proceeds in escrow accounts, which lock up more than a quarter of developers’ cash. But a significant relaxation isn’t expected as the government wants the companies to set aside funds to ensure new homes are completed and delivered to buyers, Jefferies analysts including Stephen Cheungwrote in a note.

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