China property bonds’ road to recovery fraught with risks amid drawn-out restructurings, gloomy sector outlook, and volatile markets
- Investors in global bonds from China’s property developers should brace for a bumpy ride on account of uncertain cash flows and unpredictable restructuring outcomes
- Macroeconomic risks also cloud the outlook as concerns remain about a US recession, tighter liquidity in developed markets, and a potential banking crisis
Battered Chinese property bonds have a long way to go before they recover from the mauling they received in the aftermath of Beijing’s “three red lines” policy, because of risks like drawn out restructurings, uncertain cashflows, and tectonic shifts in the sector, Allianz Global Investors’ top fixed income official in Asia-Pacific warned.
The gloomy outlook is exacerbated by the expectation of sustained volatility in global financial markets, which would force investors to focus on risk control rather than attempt opportunistic, short-term trades, said Jenny Zeng, AllianzGI’s chief investment officer for fixed income in Asia, who oversees US$6 billion in assets.
“Market sentiment around Chinese property US dollar bonds remains fragile … in the near term it may not necessarily be a good place to allocate risk,” she said. “You would want to lower your overall [portfolio] volatility.”
The rally in China’s property bonds, which comprise the bulk of the outstanding junk-rated dollar bonds in Asia, has already lost steam.
Hedge funds see tough outlook for China property bonds after stellar 2022
China’s vast property market is undergoing structural changes, said Zeng. She said these changes included uneven recovery across various cities and the differential pace of rebound in the primary and secondary markets. Appetite for property mainly comprised homeowners demand for upgrades to bigger units rather than demand for first home purchases.
“If we expect property sales to go back to 2021 levels, that’s not going to happen,” she said, while adding that China is seen accelerating its switch to high-quality economic growth driven by consumption and the services industry from the previous model driven by property and infrastructure investment.
China’s property market is expected to record a much lower default rate, providing a higher return, she said, but there remained pricing challenges given the lack of visibility about developers’ future cash flows, China’s early-stage recovery, and the broader market risks.
AllianzGI’s team has a defensive view for the current year. The team likes utilities across Asia, as non-cyclicals are expected to outperform in volatile markets. The fund is also positive on credit and currency markets, government bonds of Indonesia betting on its sustained economic growth and China’s investment-grade credit names.
“There’s a lack of [financial] liquidity and there’s a lack of conviction,” she said. “The strategy is for risk control. In today’s market, risk control is much more important than short term return maximisation.”
