China’s credit market is now showing stress on an almost daily basis, as worsening housing crisis shatters assumptions about safe borrowers and even Chinese investors turn on troubled debtors.
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The country’s junk dollar bonds arel edge of historic lowss on Thursday, as a state-backed developer sought payment delays on $1.6 billion in dollar notes. In other signs of stress, the debt of a private builder considered healthy only a few months ago sankwhile creditors rejected a restructuring plan by the parent company of BMW’s Chinese partner.
Taken together, the incidents point to a credit market in a new phase of turmoil as stress spreads from cash-hungry private developers to those backed by government and companies outside the housing sector. Chinese investors who reject unfavorable debt forgiveness or restructuring plans also suggest diminishing confidence in Beijing’s ability to deliver rapid economic change.
“Sentiment in China’s high-yield market was soured by the surprising extension of China South City,” said Ting Meng, senior credit strategist for Asia at Australia & New Zealand Banking Group. “It will be a big challenge for developers in the second half, as The real estate sector has not yet seen a bottom. Even if the industry bottoms out, the recovery of HY bonds will take a long time and be painful”.
The day began with China South City Holdings proposing changes to its dollar bonds, including extending maturities and paying principal in installments. A drop in values, which were almost on par just two months ago after a bailout, has unsettled investors who had bet his state ties would help insulate him.
Prices for high-yield Chinese dollar notes, a market dominated by developers, have approached record lows this week. While prices of some real estate notes rose on Thursday due to hedging of short positions, absolute levels remain in distressed territory.
The sell-off has affected even investment-grade peers, including China Vanke. Another builder previously considered relatively safe, Country Garden Holdings, saw trading in one of its yuan-denominated bonds briefly suspended on Thursday after the value fell 22% to 54 yuan. China’s top-performing mutual fund this year is among a growing list of investors cutting exposure, with major developers such as Vanke and Seazen Holdings dropping out of its top 10 holdings.
There was some relief later in the day.
The nation’s banking and insurance watchdog has promised that regulators will work with local authorities to ensure the delivery of real estate projects, that have stalled due to developers running out of cash.
It is asking banks to make it easier to complete real estate projects, while China Vanke was also able to sell 3 billion yuan ($444 million) of 3% debt, in the middle of an indicative range. Country Garden bonds also jumped.
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