China’s garbage debt is sliding deeper into unprecedented misery

(Bloomberg) – A worsening crisis in China’s property market is dragging US dollar bonds from the country’s borrowers into even more misery, as the collapse of deals bonds that were once one of the world’s most profitable bond trades caused ripples across the exchanges.

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Anyone who had expected a market shift from the 20th Communist Party Congress that began on Sunday has struggled with further declines in China’s foreign credit markets this week. President Xi Jinping has given some signal about any major changes in housing market policy, and Covid rules have also hampered the sector.

The average price of stocks, dominated by real estate companies, fell 1-2 cents Tuesday to a record low of less than 56 cents. China’s high-yield bonds are now down more than 55% from their peak in 2021.

This roadmap highlights the challenges facing the Chinese authorities as they try to balance long-term efforts to stem the outstanding real estate market, while preventing a more severe downturn in the industry. about one-fifth of the economy.

“The only way is with strong government involvement – ​​local governments buying properties from private developers, for example,” Raymond Yeung, Greater China chief economist at ANZ Bank, told Bloomberg TV on Tuesday.

In a sign that policy steps are increasingly met with skepticism among traders, the latest drop comes despite fresh signals of a significant expansion of a government program to help boost growth. creditial.

For the first time, developers in a small group issuing local bonds with state guarantees under a program that emerged in August are returning with more of such planned offerings. Seazen Holdings Co., which has residential and commercial projects in more than 100 cities, plans to issue up to 1.5 billion yuan ($208 million). Country Garden Holdings Co. and Longfor Group Holdings Ltd. are also planning a programmatic offering.

The arrival of the plan in August sent stocks and dollar bonds soaring. However, the upside momentum has faded for several weeks, and investors have since been watching for further signs of support, especially as a developer recently sold state-guaranteed bonds. Unable to pay the debt this month.

“This type of issue will likely be repeated as a supportive move from policymakers, but it will provide limited help to builders’ finances and investor confidence.” “, given the small issue size compared to the liquidity gap among builders, said Iris Chen, a credit desk analyst at Nomura International HK Ltd.

China’s high-yield dollar bonds have now entered their second year of losses, as opposed to averaging around 9% annual returns from 2010 to 2020. In their heyday, institutions like Credit Suisse Group AG and Goldman Sachs Group Inc. flooding into an asset class where returns stand out in a world of yield despair and where defaults are extremely rare.

It’s all starting to unravel after a nationwide crackdown on leverage and real estate speculation that began in 2020. Last year, it broke records by developers including real estate conglomerates. property giant China Evergrande Group, and exacerbated by a broader global sell-off in fixed income markets. Some developers have abandoned projects, while some homebuyers have initiated unprecedented mortgage boycotts.

China, like other countries around the world, is trying to bring down housing prices that have become expensive for city dwellers. Chinese authorities are also seeking to remove the market from assumptions that borrowers will be bailed out. At the same time, they are trying to help stabilize the real estate market amid the continuous decline in home sales.

Financial regulators recently asked the nation’s largest state-owned banks to extend at least 600 billion yuan in net financing to the real estate sector in the last four months of this year.

Recent developments have shown that even the efforts initially cheered by the market are not enough to stem the pain.

A case in point is CIFI Holdings Group Co., which is headquartered in Shanghai, which defaulted earlier this month when it failed to pay coupons on convertible bonds denominated in Hong Kong dollars. That’s especially worrisome because the company is seen as a barometer for the broader success of state guarantees.

Shares of Chinese developers are also taking a hit. A Bloomberg Intelligence gauge of the sector hit its lowest level since January 2012 last week.

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