An absence of bond issuance from China’s property sector will likely cap supply from Asia’s ex-Japan bond market this year, as investors have turned cautious towards the cash-strapped sector after several embattled developers pushed the default rate higher last year. US dollar bonds from Chinese issuers traditionally account for half of Asia’s high-yield bond market, with the country’s developers making up a significant chunk of what are also known as “junk bonds”, or those rated below BBB- by S&P Global and Baa3 by Moody’s. While the Asia ex-Japan bond market kicked off the new year with an eventful first week, when three issuers including the Airport Authority in Hong Kong , and Indian conglomerate Reliance Industries raised a combined US$11 billion, a dry spell poised for Chinese property developers will likely curb growth in total bond issuance for the rest of the year, bankers and money managers said. Wealthy investors shun high-yield bonds amid Evergrande crisis “Investors are more selective within the sector and currently prefer what they perceive as better-quality issuers with less [need] for getting imminent refinancing,” said Leong Wai Mei, a Singapore-based portfolio manager for fixed income at Eastspring Investments. Bank of America expects US dollar bond issuance from Asian issuers, including investment-grade and high-yield bonds, to total about US$325 billion this year, dragged down by a 35 per cent decline in high-yield deals that are expected to total US$54 billion. Chinese developers, many of them rated as high-yield, raised a total of US$40.8 billion in 2021 through US dollar bond issuance, Bloomberg data shows, down 30 per cent from US$57.9 billion in 2020. Bankers and fund managers said there was no publicly issued bond deal from Chinese property developers in the first week of the year. That is in contrast to the active market during the same period last year, when several Chinese developers such as Yuzhou Group, Zhenro Properties, and Redsun Properties pumped the market with high-yield bond sales, with each raising between US$300 million and US$500 million per deal, data from Refinitiv shows. News about defaults from beleaguered developers – including China Evergrande, the most indebted developer in the world with more than US$300 billion in liabilities, and Fantasia Holdings, which was downgraded to default or near-default status by international rating agencies last October – pushed default rate of the sector to 8.9 per cent in the first 11 months of 2021, up from 0.8 per cent at the end of 2020. Bank of America expects this to surge to 31 per cent this year. To be sure, overall issuance for the first quarter will still keep banks busy, said David Yim, regional head of capital markets for Greater China and North Asia at Standard Chartered. But this will be driven by other sectors such as Hong Kong corporates, or Chinese financial institutions. Many Chinese developers would still not be able to come back to the market for at least the first quarter, he said. “Over the short term, I don’t expect we could go back to the days when we could see seven to eight property deals per day, and 20 property issuers per week, like what we have seen over the past two years,” he said. Selective property developers that investors consider “reliable names” would still be able to issue deals, according to Yim. China eases ‘three red lines’ loan rules for struggling property sector “After all, investors have put their money in the sector for a long time,” he said. “They are familiar with the Chinese property sector, as the market has accumulated a lot of data points from a long history of issuance.” Investors are not entirely shunning the market, Eastspring’s Leong said, as she expects investors are open to new bond issuance from selective BBB- and BB- rated developers, which can issue with yields at “high single digit to low teens” range. “We believe some clarity on the ongoing restructuring of Evergrande and other [developers] that have announced restructuring intentions will also help to provide some stability to the broader market,” she said. Investors are also awaiting signs of further policy normalisation that would enable developers to reestablish their access to cash flow generation, said Alfred Mui, head of Asian fixed income investment management at HSBC Asset Management. Such cash flow access has been broken since Beijing introduced the “three-red lines” in August 2020 mandating developers limit borrowing and improve their financial health. “Although investors are generally cautious of the Chinese property space, investors [are still] looking for those high-quality developers who can continue to have access to the funding market with valuable assets,” he said.