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Outperforming China Junk Bond Investor Doubles Property Bets

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(Bloomberg) -- A top-performing high-yield investor in China’s onshore bond market says a long-awaited turning point has arrived for the nation’s embattled property sector and it’s time to buy the dip.

Li Kai, founding partner and chief investment officer of Beijing Shengao Fund Management Co., has been increasing holdings of developers’ notes in the firm’s seven fixed-income funds since August. Such debt now make up about half of the funds’ combined 1.5 billion yuan ($214 million) of assets, he said, and Li plans to further raise the sector weighting. During a shorter market rebound in March, he capped the funds’ exposure to builders’ bonds at below 30%.

Two of the Shengao funds have returned about 25% year-to-date, beating more than 90% of peers, according to local fund-data provider Simuwang.com. Li said he managed more than 10 billion yuan of assets, including over 2 billion yuan of high-yield bond products, at Genial Flow Asset Management Co. for four years before founding Shengao.

Li, with nearly a decade of junk-bond market experience, is betting China will come up with even more concrete measures to shore up the embattled real estate industry following some recent policy steps. To him, the turning point is a new scheme that emerged last month for a small group of developers to sell yuan bonds guaranteed by state-owned China Bond Insurance Co. The nation’s largest builder by sales, Country Garden Holdings Co., became the latest to price such notes on Friday.

The bond sales mark “a crucial moment” that policymakers have shifted to ensuring some developers remain in business and not just focus on finishing uncompleted housing projects, Li said.

The additional policy steps for China’s real estate sector that he expects should both boost home-purchase demand and help with developers’ financing. Li’s optimism is also reflected on an extended duration of his bond investment. The average duration of property bonds that Shengao invests in is nine months as of late, compared to three months in March.

Chinese high-yield dollar bonds, predominantly issued by developers, rallied for five weeks straight through Friday in a Bloomberg index off their all-time lows last month. The jumps came after Chinese authorities ramped up measures to support the property market following unprecedented turmoils for the sector the past year. Home sales and prices have continued to fall at a fast pace while bond defaults are at record levels and many projects lay unfinished.

Li said state-guaranteed bond sales may expand to include additional builders as well as more guarantors, though he doesn’t think the effort will spread across the sector. “Only developers that are still alive -- meaning haven’t extended any debt -- will get such support,” he added.

Standard Chartered Bank credit analysts Xin Yi Cheng and Bharat Shettigar wrote in a report earlier this month that a sustained recovery for the property sector is contingent on “a material uptick in contracted sales and improved credit access for developers that have not defaulted.” They said announced policies so far were unlikely to alleviate sector stress.

(Updates 2022 returns in the third paragraph and adds Country Garden oversubscription data in the table.)

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