Credit: Twists and turns in China credit


Favour quality over yield on further policy finetuning
Chang Wei Liang12 Nov 2021
    Photo credit: Unsplash Photo


    It has been a tale of two halves for China real estate credit. Markets started with a tumultuous broad sell-off that even afflicted highly rated IG property names, as investors fret about spillovers from liquidations and opacity of policy. However, sentiment was quick to turn following reports of a potential relaxation of credit regulations for developers on Wednesday. IG and better rated HY names rebounded, accompanied by a substantial rally in Chinese property stocks. That said, rebounds for the distressed and lower-rated names were tepid, as default fears continue to loom.

     

    Our belief is that China will not want financing pressures to migrate up to investment grade credit, and so the authorities should be suitably responsive in calibrating policy and mitigating risks. Reports of NAFMII’s meeting with developers points to a gentle turn towards relaxing access to onshore bond financing, which should be targeted at helping the higher quality developers. Regulators have also been petitioned to exclude from the “three red lines” any debt that is assumed for the acquisition of distressed real estate assets. Such an exclusion is constructive for industry consolidation and reducing broader risks, but acceptance by regulators may not be a given without explicit contractual ties between debt and assets, on top of additional monitoring. Further policy finetuning still looks more likely than not, and we would selectively favour quality over yield, preferring investment grade credit for Chinese developers.


     

    Chang Wei Liang

    Credit & FX Strategist
    [email protected]
     
     
     
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