Property Bonds Earn Five Times Global Debt Return: China CreditFion Li and Kyoungwha Kim
Dollar bonds issued by China’s developers are delivering five times the global average for debt denominated in the U.S. currency as housing demand strengthens in the world’s most-populous nation.
Property securities, which account for 32 percent of the Bank of America Merrill Lynch index of China’s dollar bonds, have advanced 5.7 percent since the end of June, after handing investors a 1.6 percent loss in the first six months of this year. That compares with a 3.5 percent average gain in overall Chinese notes in the greenback and 1.2 percent for debt in the currency globally, according to BofA indexes.
Home sales in China have increased as the economy shows signs of a rebound and the government refrains from adding to market-cooling measures. Country Garden Holdings Co., controlled by Yang Huiyan, the nation’s richest woman, said last week it had already exceeded its 2013 property sales target by the end of September. Premier Li Keqiang plans to build homes as an estimated 260 million migrant workers, twice the population of Japan, need to move into cities to meet demand for labor.
“With almost half of China’s population still living in rural areas, housing demand will rise as the nation continues its urbanization drive,” said Ken Hu, Hong Kong-based chief investment officer at BOCHK Asset Management, a unit of China’s fourth-largest lender. “Developers are getting lower profit margins but turnover has increased, which is positive for bondholders. We prefer those with strong cash flows and continue to buy property bonds on a selective basis.”
New home sales in Beijing almost doubled in the first six days of the National Day holidays from a year earlier, while business in Shanghai increased as well, China Securities Journal reported on Oct. 8. Average daily transaction volumes in the Oct. 1-7 period surged 50 percent in 12 of 32 major cities monitored by Soufun Holdings Ltd., owner of the country’s biggest real estate website.
“On average, companies in the sector have achieved 70 to 80 percent of their full-year targets,” said Manjesh Verma, Hong Kong-based head of Asian credit strategy and research at Mitsubishi UFJ Securities (HK) Ltd. “Over the next month or so, the bonds will hold up well, given sales have been pretty strong for a majority of developers in the year to date.”
BOCHK’s RMB High Yield Bond Fund, all of whose top 10 holdings were Chinese property developers as of the end of September, has put 5.7 percent of its money in Shanghai-based developer CIFI Holdings Group’s 12.25 percent five-year dollar notes. The fund, which oversees the equivalent of $123 million and is managed by Hu, has invested another 5.5 percent in Kaisa Group Holdings Ltd.’s 12.875 percent U.S. currency-denominated debt maturing in 2017.
The yield on Kaisa securities due 2017 has fallen 383 basis points to 8.92 percent on Oct. 11 since reaching a record 12.75 percent in November 2012, data compiled by Bloomberg show. The rate on CIFI’s debt was 9.94 percent, compared with an all-time high of 12.25 percent.
The rally may halt in the short term as the government is likely to roll out measures to cool the property market when Communist Party leaders meet in November to set economic policy for the coming years, according to Eric Liu, Singapore-based credit analyst at Aberdeen Asset Management.
“There could be measures to cut speculative demand, for example mortgage and housing price restrictions, particularly in cities with high property price appreciation,” said Liu at Aberdeen, which manages around $320 billion of assets globally. “I see property taxes being implemented in cities beyond Chongqing and Shanghai.”
Increased supply of property bonds will also limit gains, Liu said. Franshion Properties (China) Ltd. sold $300 million of five-year dollar bonds at 5.375 percent on Oct. 9, according to data compiled by Bloomberg. Greenland Hong Kong Holdings Ltd. raised $700 million from a three-year bond sale priced at 4.75 percent on Oct. 10, while China Taiping Insurance Group (HK) Co. and Wynn Macau Ltd. sold a combined $1 billion of debt.
“Issuers would rather lock in a relatively lower rate now instead of waiting for later,” said Verma at Mitsubishi UFJ Securities. “Demand is still strong for sector names due to robust sales reported by a majority of developers, and their adequate liquidity levels.”
The average yield on Chinese dollar debt has dropped 55 basis points to 5.78 percent on Oct. 11 from the end of June, BofA Merrill Lynch indexes showed. The yield on China’s 10-year government bonds climbed 51 basis points to 4.03 percent in the same period, according to Chinabond data.
A non-manufacturing purchasing managers index compiled by the National Bureau of Statistics and the Federation of Logistics and Purchasing rose to 55.4 in September from 53.9 a month earlier. The official manufacturing PMI was 51.1, above the 50 which divides expansion and contraction.
Credit-default swaps insuring China’s debt against non-payment rose one basis point to 80 in New York on Oct. 11, compared with this year’s high of 147 in June, according to CMA prices. The yuan has risen 0.1 percent this month to 6.1157 per dollar in Shanghai today, as the People’s Bank of China raised the currency’s daily fixing rate to a record and consumer prices advanced the most in seven months.
Former People’s Bank of China academic adviser Li Daokui said in an interview last week that U.S. President Barack Obama’s nomination of Janet Yellen as the next Federal Reserve chief is positive for the Chinese currency. Yellen is deemed to be more in favor of maintaining stimulus, known as quantitative easing, that has driven capital to developing markets.
“The tapering of quantitative easing is likely to be delayed if the government shutdown persists, not to say a U.S. default” said BOCHK’s Hu. “As interest rates stay low for longer, there’ll be more demand for high-yielding bonds, including Chinese property notes.”