China stimulus draws investors back to offshore bonds of troubled property sector

By Xie Yu and Summer Zhen

HONG KONG (Reuters) – Some Chinese and global institutional investors are revisiting Chinese property bonds, betting on an improvement in outlook as the government accelerates efforts to boost economic growth and revive a property sector in the throes of a debt crisis.

Investors began returning after the announcement on Tuesday of the most aggressive stimulus measures since the pandemic, mostly targeting the property sector and triggering a rally in the offshore bonds of property developers.

Credit investment specialist Beijing G Capital Private Fund Management Center placed orders worth “a few dozens of millions of yuan” to buy property bonds for the first time in several months, said its chairman, Li Gen.

“We saw determination to revive the property sector … which is a sea change” from efforts of recent years, said Li.

The rally underscores the extent to which the stimulus is restoring confidence in the sector, though analysts are split on prospects for revival in the near term.

The sector, a pillar of the world’s second-largest economy, has lurched from one crisis to another since 2021 after a regulatory crackdown on debt-fuelled construction spooked investors and lenders alike, squeezing access to funds.

Sales slowed and many developers defaulted on repayment obligations, pushing the value of developers’ U.S. dollar-denominated bonds to historic lows.

The bonds of leading developers which did not default – including China Vanke and Longfor Group – have been among the rally’s biggest gainers.

Vanke dollar bonds maturing in November 2027 rose as far as 70 cents against the dollar as of Thursday from 49 cents before Tuesday’s announcement, Duration Finance data showed.

Longfor dollar bonds due April 2027 reached 84 cents from 75 cents over the same time frame, the data showed.

Offshore bonds of developers that defaulted also perked up, with Country Garden’s dollar bonds due September adding around 2 cents to trade at around 9.1 cents.

The prices of property shares have also rallied since the announcement.

‘POSITIVE STANCE’

Investor sentiment received a further boost two days after the stimulus announcement when China’s leaders pledged to meet the 2024 economic growth target of roughly 5% and “stop decline” in the housing market.

On Sunday, Guangzhou became the first top-tier city to lift all curbs on home purchases, while Shanghai and Shenzhen said they would lower the minimum down payment ratio for first home buyers and make purchases by non-local buyers easier.

Enhanced Investment Products, a $400 million Hong Kong-based hedge fund, has been increasing its holdings of Vanke 2027 dollar bonds, said Chief Investment Officer Jason Jiang.

“While the stock rebound could be more significant, buying Vanke bonds provides a better safety margin,” Jiang said.

A trigger for where the market will go next might be home sales data due for release after China’s week-long Golden Week holiday which ends on Oct. 7, Jiang said.

Another Hong Kong-based credit fund manager said property bonds made up as much as 20% of their portfolio having stocked up before announcement thinking them over-sold.

It has been cashing out since due to uncertainty about whether the measures could lift new home sales enough to revive the sector in the near term, said the manager, declining to be identified as they were not authorised to speak to the media.

Distressed debt hedge fund Gramercy Funds Management, based in Greenwich in Connecticut, U.S., has a portfolio of bonds of defaulted developers, betting on a sector revival. The rally has boosted returns and improving macro and sector fundamentals will boost them further, said Deputy CIO Philip Meier.

“The latest actions by the Chinese authorities underpin our positive stance and substantially de-risk the case for owning these bonds,” said Meier.