Is it time for a rebound in China property credits?
With growth stability as the key policy agenda for China in 2022, we are seeing more signals from the government that it has been giving more signs that it is taking a more pro-growth policy approach. Just last week, the interest rate for the medium-term lending facility (MLF) operation has been lowered by 10 basis points (bps), the first time since April 2020 and about a month after it cut the reserve requirement ratio (RRR) in December. Furthermore, the one-year and five-year Chinese loan market quoted rates (LPR) have also been lowered last week:
- 1-year LPR down by 10 bps to 3.7%1
- 5-year LPR (the benchmark for mortgage interest rates) falls 5 bps to 4.6%1 (the first cut in 21 months).
The intensified counter-cyclical regulation of monetary policy reflects the pre-emptive direction of macro policies. Furthermore, we also see China formulating more measures to stabilize the real estate sector.
According to recent reports, under the guidance of the Financial Stability and Development Committee of the State Council, the Ministry of Housing and Urban-Rural Development, which is the sector’s main regulator, and other authorities are drafting new rules to potentially relax developers’ use of funds in pre-sale escrow accounts to assist in timely project delivery, payments to suppliers, and outstanding financings2.
These measures aim to ease liquidity stress and prevent a financial contagion in the real estate industry. The new regulations are expected to be launched as soon as the end of January, and the news has triggered a sharp increase of 10-20% in high-quality developers bonds last week.
We believe this new round of relaxation will bring some breathing space for developers. The market is now also expecting more favorable policies that might be introduced in the next few months. In conjunction with the lowering of mortgage loan interest rates, it is expected that the industry outlook may bottom out, positioning China property credits for a rebound and improving their performance this year.
China high yield credit spreads at 4 standard deviations cheaper over the last 5 years
Source: Bloomberg, ICE BOFA, Value Partners, as at 31 December 2021
Historically, the China high yield bond market may provide compelling return after market corrections
Source: Bloomberg, UBS, Value Partners, as at 31 December 2021
Overall, we believe there are increasing positive signals for China high yield investors. The new policies introduced recently by the authorities signal potential further relaxation in the near future, further boosting investor confidence in the market.
For the past six months, Value Partners has been moving up the quality spectrum of China high yield bonds. With the view of recent market turbulence in China’s property sector, we have focused on selected companies with relatively manageable debt levels in the market and companies that proactively obey the Three Red Lines policy. We believe real estate developers with stable capital and cash flows will most likely benefit from any future market rebound.
Lastly, although volatility is expected to remain elevated, we believe the current dislocation will provide opportunities in the medium to long-term but will require investors’ patience.
1.The PBOC, 20 January 2022
2.Bloomberg, SCMP, 19 January 2022
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