Chinese property bond rally fades as investors seek clarity

HONG KONG (BLOOMBERG) - A record-breaking rally in Chinese property bonds petered out on Thursday (Jan 20) amid growing investor doubt over how much a reported plan to allow developers greater access to funds from pre-sold homes will benefit distressed firms.

High-yield notes fell as much as 3 cents on the dollar after jumping on Wednesday following the reports. Bonds of Country Garden Holdings and Sunac China Holdings fell after rallying by a record.

Gains extended in the stock market, with an index of developer shares rising more than 3 per cent as traders cited short covering. With a crisis of confidence and financial contagion spreading across the property market this week, investors are looking for regulatory easing to help a credit market that is saddled with billions of dollars in losses.

Thursday's reversal in bonds shows that traders are wary of betting too strongly that the news marks a turning point for the beaten-down sector.

"The market is still cynical about (the reported rule) being nationwide," said Ms Monica Hsiao, founder and chief investment officer of Triada Capital. "In reality, we know a lot of implementations get done province by province, and also we do not know details of which types of company will be allowed more access."

Even as China cut interest rates this week and pledged to use more monetary tools to support the economy, official rhetoric on housing remains the same. In a scheduled press briefing on Tuesday, officials at the People's Bank of China said mortgage loans would be kept "basically stable".

Policymakers also reiterated the oft-repeated catchphrase that houses are for living in, not for speculation. Thursday's cut in the five-year loan prime rate, which underpins mortgages, was smaller than some economists had expected.

A number of major cities in China and some smaller municipalities tightened supervision over the use of pre-sold property proceeds at the end of last year, local media reported at the time. Such cash generally accounts for almost half of developers' inflows, according to official data.

Generating liquidity by other means has become increasingly difficult. Home sales and prices are dropping, according to recent economic data. Several of China's largest banks have become more selective about funding real estate projects by local government financing vehicles.

Sunac China Holdings' 6.5 per cent note due 2023 dropped to 59 cents after peaking on Thursday morning at 69.6 cents, according to data compiled by Bloomberg. Country Garden Holdings' 6.5 per cent note due 2024 fell 2.1 cents to 90 cents after surging nearly 14 cents a day earlier.

In the stock market, short-seller favorite Agile Group Holdings surged 13 per cent on Wednesday, the most since 2015. It gained another 4.3 per cent the following day.

An event-driven fund was among those caught by the sudden rally in Chinese property stocks, according to a Singapore-based money manager who asked to not be named discussing internal trading strategies.

The fund started closing some of its short positions on Wednesday afternoon. Another trader at a global bank said two clients were buying Chinese property shares to close out short bets on Thursday.

"We are short China property shares and have been since 2020," said Mr Daniel Yu, founder of Gotham City Research. "We were expecting some policy moves but you just adjust positions along the way. This doesn't change the long-term picture. We are sticking with our positions, hedging them by buying other China names."

Market-oriented funding channels have been all but paralysed. Selling credit offshore is prohibitively expensive and the equity market can digest only so much - when Sunac tapped stock investors instead last week, its shares sank a record 23 per cent in Hong Kong.

"The challenges will persist until there is clear evidence that most issuers have access to numerous sources of funding, including the offshore dollar bond market," said Mr Charles Macgregor, head of Asia at Lucror Analytics.

While access to funding is key, it is not the only challenge facing property developers, who have a wall of upcoming maturities to contend with. Offshore bondholders are unlikely to be the priority when Beijing's focus is ensuring that homes are delivered and wages are paid to migrant workers before the Lunar New Year holiday.

Others are more optimistic. A relaxation of pre-sales restrictions "could be the biggest and arguably most important easing measure towards the property sector so far", said CreditSights analyst Zerlina Zeng.

"This is exactly what we were hoping for," said Mr Jean-Louis Nakamura, chief investment officer of Lombard Odier Asia Pacific. "Bringing back some calm, discrimination and sustainable stability - or improvement of spreads at least of high-quality developers - would already be significant progress."

Volatility is becoming a market norm. Agile shares are the wildest in at least a decade, according to 10-day historical data. Sunac stockholders are grappling with swings that are five times more brutal than those of Bitcoin.

Country Garden's 2024 dollar bond - which rarely budged more than 1 cent daily for the better part of last year - fell 10 cents on Monday and surged 14 cents on Wednesday.

Firms, including Allianz Global Investors, Axa Investment Managers and Oaktree Capital Group, have said in recent months that they are looking to increase their holdings of beaten-down real estate debt.

Mr Jason Brown, a former Goldman Sachs Group Inc special situations group head, raised an initial US$245 million (S$330 million) last month for his Arkkan Capital to invest in Chinese distressed property loans and bonds.

A top-performing Chinese money manager said earlier in January he was buying dollar bonds of the country's developers, betting that the authorities would soon unleash measures to support the industry.

Still, the turbulence in China's financial markets is putting renewed pressure on President Xi Jinping's government to do more. China's securities watchdog recently pledged to "firmly" prevent market volatility. The Communist Party's top decision makers vowed last month to ensure stability in the economy in 2022.