China Credit Market Offers Cheapest Money Ever If You Can Get It

China’s $12.4 trillion local credit market is flooded with cheap money—but a growing number of weaker borrowers are struggling to obtain it.

A spiraling property debt crisis and the fallout from Covid lockdowns have prompted policy makers to pump cash into the financial system to support the economy. That’s dragged local benchmark yields for 3-year corporate bonds rated AAA to record lows relative to government debt, according to data going back to 2006.

All that liquidity helped keep stress muted in the onshore bond market in July, according to Bloomberg’s China Credit Tracker. China’s central bank cut a key policy interest rate on Monday to spur growth in a slowing economy, which is set to drive local financing costs even lower. The amount of defaults this year in the local market has dropped 75%, as more distressed builders dodged official delinquencies by extending debt deadlines.

But challenges are mounting for private-sector real estate firms and other borrowers that investors deem too risky. Only 28 units owned by China’s top 50 developers by contracted home sales have managed to issue yuan notes this year, down 38% from the same period in 2021, according to data compiled by Bloomberg. Large builders such as China Evergrande Group, Shanghai Shimao Co., and Yango Group Co. have been shut out of the market after defaults.

“Developers will continue to face challenges until further action is taken to allow liquidity to flow more easily within the sector,” according to Henry Loh, head of Asia credit at asset manager Abrdn Plc.

A mortgage boycott involving stalled construction sites of cash-strapped builders morphed last month into protests involving more than 320 projects in about 100 cities, adding to potential systemic risk. Policy makers are considering a plan to seize undeveloped land from distressed firms to finance the completion of unfinished housing. Delivery of homes has long been a top priority, but putting dwindling cash toward construction risks further bond defaults.

Dive into the methodology behind Bloomberg’s China Credit Tracker

That’s all kept stress elevated in China’s $870 billion offshore debt market, where property companies are the biggest junk bond issuers. High-yield dollar notes suffered the biggest loss in July since February, and average prices dropped further recently to record lows, amid a bevy of defaults and debt extensions.

Offshore creditors have grown increasingly uncertain how much money they may be able to claw back from defaulted borrowers. Angst spread after Evergrande failed to deliver a preliminary restructuring plan it had long promised by the end of July and which many had hoped would provide a template for other defaulted developers.

The median price of property bonds was about 16 cents on the dollar in late July, which may imply investor capitulation, according to Bloomberg Intelligence. Investors in the sector could face greater pressure to sell if more major funds cut their exposure. Such funds cut their stakes by $5.2 billion at par value in the month ended July 27, according to data compiled by Bloomberg Intelligence.