(Bloomberg) – A record rally in Chinese property bonds highlights the huge sums of money that would have to be poured into troubled securities if Beijing reversed its crackdown on the industry.
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High-yield bonds jumped 10 cents on the dollar and Chinese property stocks surged on Wednesday after reports that regulators could ease restrictions on developers’ access to funds from pre-sold homes. The bonds of Country Garden Holdings Co. and Sunac China Holdings Ltd. posted record gains, just days after falling to all-time lows. Junk debt rose further on Thursday, according to credit traders.
In the stock market, short-seller favorite Agile Group Holdings Ltd. jumped 13% on Wednesday, the most since 2015. It gained another 7.5% the next day, driving gains in a real estate stock gauge.
With a crisis of confidence and financial contagion spreading through the housing market this week, regulatory easing would be a welcome reprieve for a credit market that is now grappling with billions of dollars in losses. While it’s unclear whether Wednesday marks a turning point for the battered sector, traders are finding it hard to turn down bets that things will improve.
“This is exactly what we hoped for,” said Jean-Louis Nakamura, chief investment officer of Lombard Odier Asia Pacific. “Bringing back some calm, discrimination, and lasting stability – or improved spreads at least from high-quality developers – would already be significant progress.”
Volatility is becoming a market norm. Agile stocks are the wildest in at least a decade, according to 10-day historical data. Sunac shareholders are grappling with swings five times more brutal than those of Bitcoin. Country Garden’s 2024 dollar bond – which has rarely moved more than 1 cent a day for most of the past year – is moving 8 to 13 cents this week.
Firms such as Allianz Global Investors, Axa Investment Managers and Oaktree Capital Group have said in recent months that they are looking to increase their holdings of battered real estate debt. Jason Brown, former head of the special situations group at Goldman Sachs Group Inc., last month raised an initial $245 million for his Arkkan Capital to invest in distressed Chinese mortgages and bonds.
A top-performing Chinese fund manager said earlier in January that it was buying dollar bonds from the country’s sponsors, betting authorities would soon take action to support the industry.
An easing of pre-sale restrictions “could be the biggest and arguably the biggest easing move for the real estate sector so far,” said CreditSights analyst Zerlina Zeng.
A number of China’s major cities and some smaller municipalities tightened oversight on the use of proceeds from pre-sold properties late last year, local media reported at the time. These cash typically account for nearly half of developer inflows, according to official data.
Generating cash by other means has become increasingly difficult. Home sales and prices are down, according to recent economic data. Several of China’s largest banks have become more selective in financing real estate projects through local government financing vehicles.
Market-based funding channels have been virtually paralyzed. Selling credit overseas is prohibitively expensive and the stock market can’t stomach that much – when Sunac appealed to stock market investors instead last week, its shares fell a record 23 % in Hong Kong.
While access to finance is essential, it’s not the only challenge facing real estate developers, who face a wall of deadlines ahead. Offshore bondholders are unlikely to take priority when Beijing focuses on delivering homes and paying wages to migrant workers ahead of the Lunar New Year holiday.
“It’s really just a timing issue to access liquidity,” said Charles Macgregor, head of Asia at Lucror Analytics. “Challenges will persist until there is clear evidence that most issuers have access to multiple sources of funding, including the offshore dollar bond market.”
Even though China cut interest rates this week and pledged to use more monetary tools to support the economy, the official rhetoric on housing remains the same. At a press briefing scheduled for Tuesday, officials from the People’s Bank of China said mortgage lending would remain “essentially stable.” Policymakers also reiterated the oft-repeated slogan that homes are for living in, not speculation. Thursday’s cut to the five-year prime rate, which underpins mortgages, was lower than some economists had expected.
“We shouldn’t be too bullish on whether we’re going to see a major reversal,” said Winnie Chiu, senior equity adviser at Indosuez Wealth Management.
Yet turmoil in China’s financial markets is putting renewed pressure on Xi Jinping’s government to do more. China’s securities watchdog recently pledged to “firmly” prevent market volatility. Top Communist Party policymakers pledged last month to ensure economic stability in 2022.
With bonds from higher-rated issuers like Country Garden trading near distressed levels just two days ago, even a simple signal from Beijing could be enough to attract the type of investors betting on the hardest-hit stocks. .
“This is a surprisingly positive development,” said Wei Liang Chang, strategist at DBS Bank Ltd., referring to Wednesday’s pre-sales reports. “There is room for a reflexive rebound in housing credit, especially for higher quality names. This could herald greater political support for developer financing.
(Updates with Thursday’s market moves from second paragraph, adds rate cut in fifth-last paragraph)
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