Credit: China HY liquidity concerns intensify

More missed payments increased bond swaps for developers
Chang Wei Liang05 Nov 2021
    Photo credit: Unsplash Photo

    Missed repayments and bond swaps have ratcheted up in frequency across Chinese developers, showing that liquidity risks are turning more systemic in China real estate. Yango is proposing to exchange USD747m of USD bonds maturing in 2022/2023 for new debt with longer maturities to avoid potential defaults. It has also requested onshore investors for a 1-year extension on an RMB1.27bn asset-backed security that is puttable on 8 Nov. Kaisa, a developer with a hefty USD11bn of offshore bonds, also warned on Thursday that it is facing unprecedented liquidity pressure, confirming that it had missed repayments for a wealth management product it guaranteed. 

    Liquidity concerns for highly leveraged developers have clearly intensified on this spate of adverse news, further exacerbated by news of weak October property sales for some developers. A government agency reportedly claimed that lending to the real estate sector has recovered to normal levels in October, but financing access may be highly segmented. Mortgage approvals should have risen, but we suspect loans to the riskiest developers are still being restricted by banks in view of rising credit distress. Indeed, sentiment in onshore bond markets is also becoming as fragile as offshore markets, which could reflect Chinese banks trimming their real estate bond exposure, as they are some of the largest holders of RMB corporate bonds. Following the slew of unexpected liquidity woes, RMB bonds for two other developers had also seen sudden selloffs of over 10% yesterday. Loan and bond refinancing onshore may become as difficult as offshore refinancing for developers, and further policy direction could be needed before an improvement is seen.

    The good news is that China bond market stress is largely localised in the real estate sector, and broader credit conditions remain benign. While our China DACS subindex for real estate has soared to above 4%, our aggregate China DACS index remains near lows of around 2%, indicating that USD credit spreads are still quite tight for the majority of Chinese firms.


    Chang Wei Liang

    Credit & FX Strategist
    [email protected]
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