China junk-bond rally needs more catalysts to back 80 per cent surge as Value Partners looks to diversify from property debt

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Value Partners, one of the biggest local investors in Chinese high-yield bonds, said the 80 per cent rally in the market for the riskiest corporate debt in the region has likely stalled for now. New catalysts are needed to justify the sentiment-driven recovery, a top executive said. The money manager will refrain from chasing the market, after reloading some of its fixed-income funds with securities issued by Chinese developers during the rally from early November on the back of Beijing’s zero-Covid pivot, according to Ricky Tang, managing director and co-head of client portfolio management. “We may not increase our holding at current levels because the spread has already tightened and prices of many [better quality] bonds have jumped [a lot],” he said in an interview. “The opportunities have already passed” to put more money into the securities, he added. Property bonds made up almost 40 per cent of the fund’s holdings at end-January, versus less than 20 per cent in October, Hong Kong-based Tang said. The team will instead diversify into sectors such as consumer, industrial, internet and financial companies that will benefit from China’s recovery momentum, he added. China property junk-bond party is here as December rush delivers 65 per cent bonanza China’s economic reopening came sooner than most economists predicted, paying off bets in stocks and bonds. Beijing also eased access to financing for some cash-strapped developers via its “three-arrow” initiatives. Chinese high-yield bonds, one of the riskiest securities as the Evergrande crisis and defaults deepened, returned 80 per cent from a multi-year low in late October, according to an ICE BofA index. The spread or risk premium over US Treasuries - the gold standard in global bonds - narrowed to 1,290 basis points on February 28 from 2,623 basis points on November 1, according to the index, which tracks 68 Chinese bonds worth US$30 billion. The spread has stabilised at current levels since January. Healthier property companies led the rally. Country Garden’s bonds due January 2024 were indicated at 87.5 cents on a dollar on Tuesday while Dalian Wanda Commercial Management’s notes due April 17, 2023 recovered from a slump to trade near par. The performance of Value Partners’ flagship fund also mirrored the market’s latest boom-and-bust cycle. Its Greater China High Yield Bond Fund has handed investors a 39 per cent gain since late October, including a 10 per cent gain this year, according to Bloomberg data. The bond fund lost 30 per cent in 2022, on top of a 22 per cent decline in 2021, as the market cratered amid default concerns, prompting investors to take their money elsewhere. Its assets size stood at US$636 million on February 28, having shrank from as high as US$7.1 billion in July 2019, according to Bloomberg data. Value Partners’ overall assets under management also suffered from net redemptions shrinking from US$15 billion at end-2019 to US$6.7 billion at end-January, according to its exchange filings. It was listed in 2007, the first money manager to go public in Hong Kong. New opportunities will come when new issuance comes to the market, Tang added. That, however, may not come within the next three months. Higher borrowing costs offshore, pressured by the Federal Reserve’s ongoing policy tightening, will prevent developers from raising capital for now, he said. Several smaller companies tested the primary market recently. Dalian Wanda Commercial Management, for example, issued a US$400 million bond with a 12.375 per cent rate in early February. ‘Two sessions’: can new premier stir market optimism in China reopening bets? “We can’t completely skip a specific market or give up on it because some situations occurred in that market,” Tang said. “Otherwise, you will lag behind the market rebound,” he added, noting that investors need to be more selective in their picks instead.