Goldman Says China Junk Debt Not Paying Enough for Default Risk

Investors in high-yield bonds from China, the majority of which come from the real estate industry, aren’t being paid enough for assuming the risk of economic slowdown and defaults, Goldman Sachs Group Inc. said.

“For China high yield, we do not think there is sufficient premium to compensate for these risks, especially given the potentially high correlation risks in the real estate sector,” analysts at the New York investment bank including Hong Kong-based Kenneth Ho wrote in a report today. “There is better value in investment grade.”

Dollar bonds from issuers in China returned 2.24 percent since Dec. 31, tied with South Korea for third-worst performer in 15 Asian markets tracked by JPMorgan Chase & Co. The country’s policy makers have set a 7.5 percent growth target for this year, which would be the slowest expansion since 1990.

Exports and imports unexpectedly fell in March, underscoring the depth of China’s slowdown. Overseas shipments declined 6.6 percent from a year earlier, the customs administration said in Beijing today, attributing the drop partly to distortions from inflated data in early 2013. Imports fell 11.3 percent, leaving a trade surplus of $7.71 billion.

Concern about non-payment in the real estate industry is mounting after Zhejiang Xingrun Real Estate Co., a builder in a city south of Shanghai, collapsed with 3.5 billion yuan ($564 million) in liabilities last month. The nation’s credit default swaps rose to 87 basis points on April 9 from as low as 64 in November, after Shanghai Chaori Solar Energy Science & Technology Co. on March 7 became the first company to default on corporate bonds in its home market.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net Andrew Monahan

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