Evergrande crisis: after US$51 billion of defaults, China market rarely this cheap as Value Partners adds to bond fund

Name: Chinese real estate giants Evergrande and Kaisa continue unloading assets to cover debt
Uploaded: 2022-03-06T23:30:31.000Z
Duration: 3 min 2 s
Description: Chinese real estate giants Evergrande and Kaisa continue unloading assets to cover debt

Chinese dollar junk bonds have declined every month since August, handing investors a 50 per cent loss over the past 12 months, ICE BofA Index shows

China’s high-yield market is in ‘significant default cycle’ where nearly US$51 billion defaulted in 2021, US$49 billion of them from the property sector: Varde Partners

Reading Time:3 minutes

Why you can trust SCMP

Pedestrians wait to cross a road in front of a public screen displaying market activity in Shanghai in February 2022. Photo: Bloomberg

Cheryl Heng

Published: 7:30am, 7 Mar 2022Updated: 9:23am, 7 Mar 2022

A seven-month slump in Chinese junk bonds has created a rare opportunity to scoop up bargains, especially in the dominant property sector, amid widening cracks in the market, according to Hong Kong-based money manager Value Partners.

Prices have declined while risk premium widened to the highest levels in more than a decade as more companies reneged on their debt obligations. The fallout is typically associated with major dislocations and panic selling, and is normally followed by a rebound as appetite and market stability return.

“We are concentrating on buying names that are considered benchmarks and also those that provide good liquidity to the market when we have to exit,” said Gordon Ip, chief investment officer for fixed income. “We are also actively involved in names that have unique events around them.”

Gordon Ip, chief investment officer for fixed income at Value Partners, Hong Kong. Photo: Handout

Ip, who manages the Greater China High Yield Income Fund, has added Chinese property bonds to its portfolio in recent months in a bet on market recovery, taking their share to 30 per cent of the fund’s assets, versus 12 per cent in November, Ip said in an email interview with the Post.

The US$1.3 billion fund is part of the US$9.3 billion of assets managed by Value Partners, which became the first money manager to be listed in Hong Kong in 2007.

Confidence in Chinese credit waned over the past year as Beijing’s “three red lines” policy to curb excessive leverage caused a cash crunch, drying up funding for indebted developers and sending more than US$49 billion of bonds from China Evergrande and peers into default.

03:02

Chinese real estate giants Evergrande and Kaisa continue unloading assets to cover debt

The ICE BofA China corporate high-yield index, which tracks 163 bonds with US$45 billion of face value, has fallen every month since August as more developers failed to repay creditors. Property developers and managers account for 56 per cent of the bonds in the index.