Advertisement
Bonds
OpinionComment
David Chao
David Chao

Macroscope | How China’s response to property woes could herald a bigger, better bond market

  • As Beijing tries to manage debt fears in the property market, the central bank has laid out a road map aimed at creating a high-yield bond market
  • Making it easier for private firms to issue bonds would be a welcome development for yield-hungry investors and signal further opening up

Reading Time:3 minutes
Why you can trust SCMP
3
Residential buildings in Beijing on September 17. Despite some high-profile struggles among developers, Chinese real estate has performed well as a sector in the past year. Photo: AFP
David Chao

It is no secret that China’s bond market has had a rough year. Since January, both Asian and Chinese bond markets have underperformed other major global bond markets.

Advertisement
Weakness has mainly come from China’s small, volatile US dollar-denominated offshore high-yield market, which has seen heavy selling amid a dimming property sector and new regulatory policy risks. More recently, the market focus has zoomed in on China’s heavily indebted developers that have missed interest payments and whether this is just the tip of the iceberg.
A common belief among China bond investors has been that policymakers would provide a backstop for troubled state-owned enterprises and strategically important businesses. But they have shown an increasing tolerance for letting troubled companies go under, and investors are reassessing assumptions.
This shift, coupled with regulatory scrutiny of various economic segments under President Xi Jinping’s “common prosperity” theme, is driving Hong Kong stocks further into bear territory.

The market’s focus on real estate developers is understandable, although we should remember that recent headlines have focused on somewhat idiosyncratic risks at specific high-profile names. Extrapolating this to the entire credit market is a stretch.

02:28

Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch

Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch

Moreover, it is important to look at the broader macro environment. Real estate as a sector has done well this year – property investment was up 11 per cent year on year as of August, while property sales were up around 16 per cent year on year. The average home price growth in seven major Chinese cities has ranged between 3.4 per cent and 4.5 per cent year on year in 2021.

Advertisement