The China Debt Haven You Didn't Expect
Much has been said about China's purported property bubble and ghost cities, but when it comes to junk bonds, listening to that would have meant risking going backward a lot faster.
Over the past month, dollar debt that's been sold this year from Chinese developers and local government financing vehicles -- whose fate is deeply intertwined with real estate -- has outperformed other sectors. That's in spite of prolific issuance.
It might sound counterintuitive to an observer in New York or London but the case of Chinese property is easy to make when numbers like today's new-home prices are released. Excluding government-subsidized housing, values gained last month in 62 of the 70 cities tracked by the government, compared with 63 in September, and the trajectory has been positive for almost a year.
No matter what the pundits say, it's hard to argue with such strong figures.
That doesn't mean it's any less risky to invest in bonds from developers. These are companies with fewer funding options that are more likely to go offshore cap in hand for money, as I've said before. And now, they're even more leveraged. Yet, when it comes to their actual business, they look to be doing just fine. If nothing else, real estate is one of the industries least correlated with exports, which may face headwinds during a Donald Trump administration.
Higher property prices also benefit local government financing vehicles because municipalities in China still derive most of their revenue from selling land for development.
So-called LGFV debt is also being helped by increased Chinese bank demand. The amount of dollar deposits lenders have been taking has probably been rising as yuan depreciation accelerates -- the People's Bank of China has weakened the currency fixing for 11 days, the longest streak on record. That extra cash has to be deployed somewhere and foreign-currency denominated LGFV notes fit the bill nicely.
The most successful money managers tend to thrive in times of market volatility. In Asia, investors who see through the slew of negative chatter about busts and bubbles and focus on the data will emerge true winners.
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