China dollar bond market: risks and opportunities ahead as property sector defaults continue in 2022
China's dollar bond market is expected to continue seeing defaults - especially in the stressed property sector. Diversification of investment portfolios amid policy uncertainty could be a safer bet, analysts and industry veterans said.
The cumulative default rate of China's high-yield dollar bonds is expected to rise to 42 to 45 per cent in the coming three to six months in 2022, from 38 per cent in 2021, said Jack Siu, Credit Suisse's Greater China chief investment officer.
The extended default risk in the world's second largest bond market was expected to remain a key theme for investors to keep an eye on in the coming year. With its ripple effect to other asset classes, such as the equity market and China's wider economy, its trends are seen as one of the biggest uncertainties in the investment space.
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"We remain cautious in this environment. We are looking for signs of stabilisation in the property market," said Siu, adding that his team preferred less risky industries and avoided Chinese property issuers. "The dollar bond market for China unfortunately right now - especially in the high-yield space - is still likely going to remain shut until we see signs that the stressed situation is coming to an end. But, so far we haven't seen enough. "
Investment banks and funds have widely highlighted the risk of policy uncertainty in their 2022 market outlook, and most of them also stressed lingering concerns about the liquidity situation of private property developers.
In the past year, starting from China Evergrande Group's liquidity crunch in September, defaults at developers have accelerated. Fantasia Holdings Group, China Properties Group and Modern Land have joined China Fortune Land Development and Sichuan Languang Development on the list.
Goldman Sachs has forecast that the default rate in the China property high-yield bond segment will reach 28.7 per cent between the end of November and the end of 2022. That will contribute to the overall high-yield corporate bond default rate in Asia reaching close to 12 per cent in 2022, with 90 per cent deriving from the Chinese property industry, the investment bank said.
The forecast comes as China's offshore bond market has lost much of its refinancing function for Chinese issuers, especially since the third quarter of this year. Dollar bond issuances by Chinese companies - excluding financial institutions - fell 6.2 per cent in the first 11 months of this year, data from Fitch Ratings shows.
On the other hand, total maturities of Chinese dollar bonds in 2022, including those with put options, will surge 19 per cent to at least US$118.5 billion from a year earlier, according to the ratings agency.
"But this may not translate into a solid increase in new dollar primary deals in 2022," said Shuncheng Zhang, associate director of China corporate research at Fitch. "The risks should still mostly stem from the property sector. Many weaker private property developers are still facing funding difficulties, in both onshore and offshore bond markets."
Recent policy action by Beijing, including cuts in one-year loan prime rate and the reserve requirement ratio, is relatively positive, but it takes time for policies to be implemented, and then for liquidity to be transmitted to the market and individual companies, said Wang Yifeng, an Asian credit markets veteran now leading a global credit fund.
"The timing - when it will be transmitted to a specific province, specific industry or company - is uncertain. Maybe, a company collapses before it sees the dawn," he said.
"When it comes to the risk of individual names, you may have to manage your concentration level, as everyone in the market mostly relies on guessing which one will become the next Evergrande or Kaisa," Wang said. He stressed the need for diversification to maximise returns during a time that he sees the market gradually bottoming out. "Some names obviously are safe, but the return is low."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.
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