Investors starting to shun Chinese real estate bonds

Bloomberg's headline says that China's real estate bubble has burst in the bond market but I'm not so sure. In any case, here is the story:


Dollar bonds sold by China real estate companies this year are the worst performers among Asian non-financial corporate debt denominated in the U.S. currency amid concern the nation’s property market is overheating.


Yields on the $3.9 billion of bonds issued by Kaisa Group Holdings Ltd., Country Garden Holdings Co. and seven other developers since January widened by an average 2.26 percentage points relative to Treasuries as of last week, according to data compiled by Bloomberg. That’s more than the 2.05 percentage- point increase in spreads for the seven dollar-denominated bonds sold by other companies in Asia outside Japan.

Investors are demanding greater yields to lend to China property firms, a sign they expect borrowers will have a harder time meeting debt payments amid a government clampdown down on lending.

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The amount of dollar bonds issued by China developers represents 45 percent of all corporate dollar debt sales in Asia outside Japan this year, Bloomberg data show. The yield spread on $350 million of 13.5 percent notes sold by Shenzhen-based Kaisa last month widened the most of the nine issues, expanding to 16.52 percentage points from 11.07 percentage points, Nomura Holdings Inc. prices on Bloomberg show.


Kaisa is developing 18 projects in Shenzhen, Dongguan and other cities in the Pearl River Delta, most of them high-rise residential complexes that combine recreational and commercial space, according to its website. An investor who bought the company’s 2015 bonds at par would have lost 15.5 percent.

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China property developers paid coupons as high as 14 percent to issue dollar debt this year, compared with an average 9.2 percent for other companies in Asia and 6.2 percent for U.S. property companies. On average, Chinese property companies are paying a 10.875 percent coupon.

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10 Response to Investors starting to shun Chinese real estate bonds

June 1, 2010 at 1:41 AM

Poverty is stranger to industry.......................................................

June 1, 2010 at 1:41 AM

Poverty tries friends.......................................................

Martin
June 1, 2010 at 4:26 AM

Why are you not so sure?   Not that I disagree, just curious about you reasoning.

Sivaram Velauthapillai
June 1, 2010 at 9:37 AM

I'm not doubting the bubble; I'm doubting that it has burst.

I hate trying to call a top based on short-term price movements (in thise case, from the bond market.) Just because investors are selling off Chinese real estate bonds all of a sudden doesn't necessarily mean the bubble has burst. For all I know, it could be a temporary risk aversion (due to general sell-off across the board) and the real estate bonds could rally in a month.

Martin
June 1, 2010 at 11:20 AM

Yeah, I've been thinking about shorting China a while now.  Didnt realise stocks of these Chinese property development companies were fully tradable and listed in Hong Kong until today. Seems they all went down 20-50% or so in May so it's a bit frustrating having missed that downturn.  As you say, it could very well be temporary risk aversion and the stocks and bonds might rally in a month.  Feels a bit risky to short now.

Sivaram Velauthapillai
June 1, 2010 at 4:00 PM

Yep... many of those real estate companies, not to mention the whole Chinese market, started correcting last year. Even if the real estate companies never fell, I'm not sure how safe it's to short them. The market may be pricing in bearish scenarios already. Almost everyone, including people with a neutral stance, pretty much accept the possibility of real estate companies getting hit if real estate tanks. So the bearish side may not be so great with real estate companies.

Another idea I was contemplating was Chinese banks. But the risk is that the government may "bail them out" (although shareholders may get killed anyway.)

Parker Bohn
June 1, 2010 at 9:11 PM

There seems to be a big difference in valuations between A-shares (only listed in China) and B-shares and H-shares (which are available to global investors, and appear to have more reasonable valuations).

For instance, the Shanghai index looks like its down about 25% from its peak last year, but China ETFs that we have access are all down less from their peaks.  For instance, GXC is down about 15%, FXI is down about 17%, PGJ is down 14%, and YAO is down 14%.

Keep in mind, CNY is pegged to USD, so this performance difference reflects a different asset mix, and not exchange rate effects.

Anyone thinking about investing in (or shorting) China will definitely have to consider the impact of their capital controls.

Sivaram Velauthapillai
June 2, 2010 at 12:42 PM

Yep... that has always been the case. Shares listed on the mainland have historically been ridiculously overvalued compared to Hong Kong. In fact, at one point a few years ago, there were several companies who were trading at market caps close to $1 trillion if you used the mainland exchange prices.

Somtimes the capital controls work the other way. I remember a few years ago when valuations in locally-listed Indian shares being cheaper than the NYSE-listed ADRs (India has capital controls although not as strict as China's). Similarly, locally listed Brazilian shares were cheaper than equivalent shares listed on NYSE (Brazil doesn't have capital controls but still isn't easy for many investors to access.)

Parker Bohn
June 5, 2010 at 7:58 AM

It occurs to me that the price difference between A-shares and H-shares is another piece of evidence that the Yuan is undervalued compared to the Hong Kong Dollar and other currencies.

Sivaram Velauthapillai
June 5, 2010 at 4:13 PM

Capital will leave China if it were open. After all, a Chinese person would rather invest in cheaper, identical, H shares than the expensive A shares. So this does indicate that the reminbi would decline if the markets were open.

Having said that, I think the factors that drive currencies are too numerous and this scenario (identical shares being overvalued in China) may only be a minor factor. Although I'm not expecting it, I can visualize a scenario where China devalues its currency if there is a major bust. This, of course, would run counter to the consensus expectation.

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