Fri. Dec 3rd, 2021

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Dear readers,

Sometimes a single number says more than a thousand words. Chinese junk effects now yield an average of 24 percent hair. They have sent Asian high-yield bond prices down sharply in recent weeks, amid growing credit concerns.

The sales spread to China’s investment grade bonds. Bonds issued by China Vanke, the largest listed local residential developer, and its Hong Kong entity received a notable blow.

Investors startled by apparent defaults by high-leverage real estate group Evergrande have also begun pouring debt from other sectors. The yields of large, typically solid companies such as Alibaba, Kweichow Moutai, ICBC and Tencent have also risen.

Concerns about contamination of real estate and related sectors are understandable. They make up a large part of China’s economy, almost 30 percent.

Beijing is increasing pressure on developers. Those in Beijing and other major cities are experiencing difficult new restrictions on how they can use their funds. An unusual feature of the local market is that they are allowed to finance new buildings and projects with proceeds from pre-sale properties.

This is their main source of funding besides bank loans. They may now have to complete buildings under construction before raising cash through pre-sales.

The authorities have good intentions. They want to reduce the implicit leverage of developers who have raised cash from unfinished properties.

Yet the timing is bad, limiting working capital when it is most needed. Projects under construction now have a greater chance of being completed. But buyers who have paid for the homes that are not yet under construction are at risk of losing out in a developer cash crisis. This will further weaken sentiment and property prices.

Bar graph of high-yield dollar debt issuance ($ billion) showing how the Evergrande crisis hit Chinese developers' dollar bond sales

Other sources of cash, both for construction and for debt repayment, are running out. Dollar debt sales by local developers fell more than a third this year, reflecting a decline in investor appetite. Selling property appears to be more difficult than expected. Evergrande, for example, was able to sell assets unrelated to its core business, such as its two private jets. But potential buyers have rejected most of its assets, which are in real estate.

This was a common theme among concerned developers. Modern Land China and Oceanwide Holdings are struggling to sell excellent assets in Hong Kong and Beijing.

Many buyers do not have enough liquidity to buy large ticket items. Those who do face it, face a weakening outlook and lower self-esteem. They have an incentive to hold out for lower prices as sellers become increasingly desperate.

But when it comes to investment grade bonds in sectors outside real estate, the picture is much clearer. China posted a record monthly trade surplus in October due to rising exports. Global supply chain disruption did not have a significant impact on local companies. Exports rose 27 percent last month from a year earlier to $ 300 billion, according to customs data, marking the 13th consecutive month of double-digit growth.

Electronic and other machines accounted for nearly 60 percent of total exports by Chinese companies by value this year. It demonstrates the resilience of manufacturing earnings. Concerns that the slowdown in the Chinese economy justifies a sell-off in local equities and bonds have been exaggerated.

Wednesday is a big day for Chinese bondholders. The 30-day grace period on three $ 148 million Evergrande coupon payments expires. On the same day, China opens books to sell € 4 billion worth of new government bonds.

Evergrande bondholders are tired. Despite Evergrande pulling through the payments in the last hours of its previous 30-day grace period, the sharp capsule against which securities are trading has not narrowed.

Government bonds are another kettle fish. China’s trade surplus should increase further as demand for construction-related goods slows. Imports of commodities such as iron ore were directly correlated with the health of the weakening local real estate market.

China’s foreign reserves reached $ 3.2tn at the end of October, which was above expectations. These figures give Beijing the space to continue its repression of the real estate sector. That pillow should also prevent contamination to world markets.

Revenues from developed markets have exhausted begins to look. This means that there will be bargains for fixed-income investors under China’s investment-grade corporate bonds and even its well-offered sovereign debt.

Enjoy the rest of your week,

June Yoon
Lex author

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