Hot Money Rolling Into China Property Seen Deflating Bond Bubble

  • `Heating up of property' to hurt bond market: China Securities
  • Home prices in Shenzhen gained 52 percent in the past year

A woman walks across a pedestrian footbridge near commercial buildings in Beijing, China, on Wednesday, March 2, 2016.

Photographer: Qilai Shen/Bloomberg

China’s ball of hot money, which rolled from property to stocks to bonds leaving a trail of unprecedented gains and losses, looks set to come full circle.

Home prices in Shenzhen, China’s southern business hub, have jumped 52 percent over the past year, while those in Shanghai surged 18 percent, prompting the official Xinhua News Agency to warn against “panic” buying. The yield premium on top-rated five-year corporate bonds over government securities has risen to 68 basis points after slumping to an eight-year low of 54 in January.

“The heating up of property will hurt the bond market,” said Ji Weijie, credit analyst at China Securities Co. “Money that goes into property will not come out easily because it’s usually a long-term investment.”

Global brokerages are warning China’s bond “bubble” risks a collapse similar to last summer’s Shanghai stock rout and foreign funds are heading for the exit in record numbers. While surging local demand has helped sustain a 105 percent surge in Chinese note issuance this year, investors’ shift into property assets could make refinancing harder for firms facing a record 4.8 trillion yuan ($735 billion) in onshore debt coming due this year.

Support for the housing market is a core part of efforts to counter the worst economic slowdown in a quarter century. Authorities this week lowered reserve ratios for lenders and have allowed them to cut minimum mortgage down payments in areas without purchase restrictions to the lowest level ever. New-home prices climbed in 25 cities in January compared to a year ago, up from 21 cities in December.

Hua Chuang Securities Co. wrote in a Feb. 23 report that rising housing costs could lead to higher inflation and a reversal of stimulus policies, both of which could be bad for bonds. Bai Chongen, adviser to the central bank, said China’s current monetary policies risk fueling property “bubbles.” 

Ji at China Securities said banks may have to sell notes to meet deposit withdrawals and investors are also likely to draw funds from wealth management products. Genial Flow Asset Management Co. in Beijing said it saw clients withdraw money from bonds to buy properties, according to Cheng Peng, head of investments at the fund manager with over 10 billion yuan of assets under management.

Sales Increase 

Should the market correct, there is a long way to down for the riskiest corporate debt. As prices rallied, yields on AA- rated five-year notes have dropped to 4.19 percent from 8.26 percent at the end of 2013 after two consecutive years of record declines.

Bond bulls point out that the consumer inflation index rose a weaker-than-expected 1.8 percent in January from a year ago. While at least nine companies have failed to repay debt in the past two years, the overall default rate is still low by global standards and China’s yields are attractive in a world of negative interest rates.

Future Land Development Holdings Ltd, which generated about 60 percent of its business last year in first-tier city Shanghai and second-tier cities Nanjing and Suzhou, reported contracted sales of 4.3 billion yuan in January, more than double the amount a year ago.

Developers sold 79 billion yuan of onshore bonds in the first two months, a fourfold increase on a year earlier.

“The rapid credit expansion is good for property bonds because it will help boost their credit quality,” said Chen Yiping, a bond fund manager at HFT Investment Management Co., which oversees 46.9 billion yuan of assets. “But it’s bad for high-grade corporate bonds and government bonds.”

— With assistance by Lianting Tu, and Judy Chen

Before it's here, it's on the Bloomberg Terminal.