China’s real estate bonds see good times ending

Bloomberg

Steps to cool China’s property market are stoking speculation the good times are about to end for developer bonds offshore.
The hangover would be big. Yield-starved fund managers around the world have piled into the $65 billion market for dollar-denominated notes sold by Chinese builders. There is plenty of scope for pain after yield premiums for lower-rated US-currency securities from the nation, the majority of which are from real estate borrowers, dropped to the lowest level since 2007 this month, according to a Bank of America Merrill Lynch index.
“We are not optimistic about prices and sales in the property market,” said Xu Cheng, who will be fund manager for Franklin Templeton Sealand Fund Management Co.’s new overseas bond fund, which finished raising money on January 19. The Shanghai-based joint venture of the San Mateo, California-based group oversees 20.1 billion yuan ($2.9 billion) of assets. “We estimate there will be a correction in Chinese developers’ dollar bonds. The near-record low yield premium isn’t big enough to cover credit risks.”
Regulators concerned about a bubble have succeeded in taking some of the froth out of housing prices. China Bond Rating Co. estimated property sales volume may suffer a “substantial decline” this year as local governments step up buying restrictions and down-payment requirements. A government report showed home prices fell in Beijing, Shanghai and Shenzhen in December and increased in the fewest Chinese cities since January 2015. The nation’s onshore real
estate securities may be the riskiest part of the local yuan-deno-
minated debt market in 2017, according to the largest number of respondents in a survey of domestic analysts and traders conducted
December 22 to 26.
Some investors believe the government won’t permit a slump in real estate. “The property industry has been and is still one of the pillars of the Chinese economy,” said Wu Xiangjun, an overseas bond fund manager in Shanghai at Guotai Asset Management Co., which oversees 77.7 billion yuan of assets.
The government probably won’t loosen controls on property bond financing in the first half, according to Christopher Yip, an analyst at S&P Global Ratings in Hong Kong.