Credit: Mixed sentiment in China credit

HY credit is still facing liquidity risks
Nathan Chow29 Oct 2021
    Photo credit: Unsplash Photo

    China HY credit sentiment remains mixed, with developers not quite out of the woods. While sentiment was lifted by Evergrande dramatically averting default by repaying some of its overdue interest within the grace period, Modern Land, a much smaller developer with CNY 100bn of assets, defaulted on a USD250m bond on Monday. Liquidity risks could stay elevated for some time in the Chinese real estate sector, especially if property sales are to languish as buyers await clarity on new property taxation to be unveiled by the State Council. We reiterate our view that credit for the riskiest firms should remain unfavoured, notwithstanding a possible recalibration of policy measures (see Credit: Relief in China credit amid reassurances, 22 Oct 2021).


    Chinese policymakers are also moving to assuage concerns that offshore USD bondholders may be less favourably treated compared to onshore bondholders. China’s National Development and Reform Commission (NDRC) held a meeting with developers this week, emphasizing that they should meet all offshore debt obligations and uphold their reputation and market rules. Selective defaults in the offshore market are emphatically not acceptable for the authorities, and the NDRC clarification this week should reassure offshore investors that they will be treated fairly alongside onshore investors. The NDRC also mentioned that developers should improve their foreign debt structure, which is particularly pertinent given high yields and refinancing risks in the USD credit market. The good news is that the NDRC will continue to approve reasonable requests for FX transfers to meet offshore debt repayments. As such, we could see Chinese firms relying more on onshore RMB financing going forward, while reducing offshore USD liabilities that are now expensive to refinance


    Chang Wei Liang

    Credit & FX Strategist
    [email protected]
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