Goldman Sachs: Defaults on Chinese high-yield property bonds to remain elevated in 2024 amid weak property sales

The default rate will reach 35 per cent in 2024 after hitting 42.2 per cent in the first nine months of 2023, the investment bank predicts
In Asia’s high-yield bond space, Goldman prefers credit issued by Macau gaming companies and commodities companies

Bonds

Jiaxing Li

Published: 7:00pm, 20 Nov, 2023

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The default rate for Chinese high-yield property dollar bonds will remain elevated next year as property sales continue their slide, putting more strain on already stressed liquidity conditions, according to Goldman Sachs.

China’s default rate for high-yield property bonds has reached 42.2 per cent so far this year, slightly below a record 46.8 per cent in 2022, Goldman strategists including Kenneth Ho said in a report to clients over the weekend. The rate is likely to hit 35 per cent in 2024, they predicted.

“Our China property team expects difficult market conditions to continue,” the US investment bank said. Primary property sales will decline by 5 per cent year on year in 2024 as increasing supply in the secondary market adds to pricing pressure, which could create a negative feedback loop on price and volume in the primary market.

“Liquidity pressures will remain challenging for China property [high-yield] developers, and defaults will continue,” they said.

An aerial photo taken on October 9, 2023 shows residential buildings under construction by Chinese developer Vanke in Nanjing, in China’s eastern Jiangsu province. Photo: AFP

China’s dollar-denominated high-yield bonds, dominated by property-sector issuers, have handed investors a 23.2 per cent loss so far this year, after a 33 per cent slump in each of the past two years, according to the ICE Bank of America Index.

The index tracks 35 bonds with a market value of US$16.8 billion. They yielded 16 per cent or 1,156 basis points above Treasuries as of November 17.

Three years earlier, before the onset of Covid-19 and the first debt defaults in China’s property market, the index tracked 236 bonds worth US$115 billion offering 9.25 per cent average yield, or a 904-basis-point spread over Treasuries.

China’s home rental market set to weather property crisis as buying demand tanks

Country Garden, once considered a healthy private developer, plunged into distress this summer and missed a coupon payment of US$60 million in October. The firm is now working to pull together a tentative plan to restructure its offshore debt by the end of this year, according to a Reuters report. China Evergrande Group, meanwhile, awaits a final hearing next month as its insolvency process continues.

Last week, ratings agency Moody’s stripped Longfor – considered healthy until recently – of its investment-grade credit ratings due to a negative sales outlook amid China’s sluggish home sales and tight funding conditions.

The turmoil has pushed some money managers to move away from China’s broken property market and seek income outside the country. In Asia’s high-yield bond space, Goldman said it prefers credit issued by Macau gaming companies and commodities companies.

“Asia’s high-yield market has become smaller, though risks are now more diversified,” Goldman’s note said. “We believe a sectoral approach makes sense.”

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