China’s Property Bonds On The Edge Of Default

As the industry lurches from crisis to crisis and blows a large hole in the performance of asset managers, fund managers are reducing their holdings in Chinese property bonds by 50% or even more.

Refinitiv statistics show that 204 out of 242 dollar-denominated bonds issued by Chinese real estate companies are now trading at under 50 cents on the dollar, severely impacting investors’ liquidity and reducing their ability to wait for a recovery. Many developers are choosing to reduce their losses due to irate apartment customers boycotting mortgage payments, declining new house sales and pricing, and rescue initiatives that have so far failed to help developers out of a liquidity jam.

How Is the Industry Reacting?

According to Morningstar, the five major Asian high-yield funds reduced their holdings in Chinese property bonds from 27.6% at the end of last year to 16.4% at the end of June. For instance, the BGF Asian High Yield Bond D2 USD fund reduced its exposure to Chinese real estate bonds from 27.1% on December 31 to 14.7% at the end of June. Additionally, the Fidelity Asian High Yield A-Acc-EUR and PIMCO GIS Asia High Yield Institutional USD funds were reduced from 22% and 31.7%, respectively, to 11.9% and 22%, respectively.

Many consumers are now hesitant to keep onto their property bonds as the liquidity problem worsens, according to Kunal Sawhney, CEO of research firm Kalkine Group. Since the start of the crisis, even top institutional investors are reducing their holdings in high-yield Chinese dollar bonds as investor confidence starts to waver.

According to Patrick Ge, a research analyst at Morningstar, the decline in Chinese property bond holdings was also caused by a mix of decreasing bond production and defaulted bonds being removed from indexes. In other high-yield Asian sectors like Indian renewable industries and Indonesian property space, he added that they’ve seen numerous managers moving away from China property and discovering chances.