Yuan Policy Likely to Buoy Chinese' Developers Bonds, Morgan Stanley Says

Foreign currency bonds issued by Chinese property companies may receive a “terrific boost” after China signaled the end of a two-year currency peg to the dollar, reducing the chance of higher borrowing costs, Morgan Stanley said.

“The policy change paves the way for less aggressive policy hikes,” Morgan Stanley analyst Viktor Hjort wrote in a note to clients today. The move “would suggest a shift in the balance of policy tightening away from the domestic towards the external sector. This would in our view represent a terrific boost.”

The currency move may be an “inflection point” in policy that signals an improvement in the prospects for Chinese property companies, said Morgan Stanley. The People’s Bank of China pledged to make the yuan more flexible on June 19 at 7 p.m. Beijing time in a posting on its website. A stronger yuan, also known as the renminbi, would increase the purchasing power of households in China, help to control inflation and lift pressure to raise interest rates.

In a separate move, the New York-based firm on June 18 upgraded its outlook for bonds of China’s property companies to “neutral” from “underweight” compared with high-yield bonds issued by companies elsewhere in Asia, citing the industry’s success in weathering market-cooling measures, and on expectations that moves in monetary policy will be more gradual.

Chinese property companies have strong cash positions and better debt maturity profiles than at any point since a large volume of bond issuance in 2006, wrote Hjort in the e-mailed note, who recommended focusing on companies with the biggest market capitalizations, such as Country Garden Holdings Co.

Agile, Country Garden

Agile Property Holdings Ltd.’s $650 million of 8.875 percent bonds due 2017 rose to 96 cents on the dollar today from 94.875 cents on the dollar on June 18, according to Nomura Holdings Inc. prices on Bloomberg. Country Garden Holdings Co.’s $550 million of 11.25 percent bonds due 2017 rose to 95.5 cents on the dollar from 94.5 cents.

“It’s increasingly clear this sector has defied the more bearish expectations,” Hjort wrote, when upgrading the outlook.

China’s real-estate prices jumped 12.4 percent across 70 cities in May, adding to the 12.8 percent surge in April that was the most since the data series began in 2005. The government instituted measures ranging from a ban on loans for third-home purchases to higher mortgage rates and downpayment requirements for second-home purchases.

--Henry Sanderson, Katrina Nicholas. Editors: Hugh Chow, Tom Kohn

To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at 86-10-6649-7548 or hsanderson@bloomberg.net

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