China’s developer bond slump deepens as selling spreads onshore

China’s property firms are caught in a vicious circle where surging borrowing costs make refinancing upcoming maturities prohibitively expensive, thereby triggering further losses in their bonds as traders price in potential haircuts.

The selloff in Chinese property dollar bonds intensified on Thursday amid signs of cracks emerging in the nation’s much larger onshore market.

China: Residential prices fell for the first time in more than six years in September  (File Photo)

Kaisa Group Holdings Ltd. led declines in the nation’s offshore bonds, while Shimao Group Holdings Ltd.’s 4.75% dollar bond due 2022 was poised for its biggest drop on record. China’s dollar high-yield debt fell for the 10th day in 11 after yields climbed above 21%. Trading was halted in two yuan bonds after they plunged more than 20%.

China’s property firms are caught in a vicious circle where surging borrowing costs make refinancing upcoming maturities prohibitively expensive, thereby triggering further losses in their bonds as traders price in potential haircuts. A slowing property market and strict rules on leverage are adding to their challenges, while credit assessors are downgrading the industry’s companies at the fastest pace on record.

“The massive rating downgrades and lack of substantial easing of property curbs triggered the plunge in domestic bonds,” said Zhijun Zhang, chairman of Beijing Dingnuo Investment Management Co. Ltd “Concerns are growing about an increasing number of private developers, especially after the dramatic sales slowdown.”

Residential prices fell for the first time in more than six years in September, while the rate of land parcels left unsold surged to the highest since at least 2018.

So far the turmoil has been largely limited to China’s offshore bonds. Any evidence contagion is spreading to the nation’s $12 trillion domestic credit market may prompt policymakers to take action to avoid a potential cash crunch. The central bank, which at the end of October injected almost 1 trillion yuan into the banking system, has been draining liquidity this week.

Confidence in the real estate sector -- that by some estimates accounts for nearly a quarter of gross domestic product -- has been worn down by China Evergrande Group’s cash crunch. Chinese borrowers have defaulted on more than $9 billion of offshore bonds this year, with real estate firms accounting for a third of that. The government’s plans to expand property tax trials to cities beyond Shanghai and Chongqing has also frayed investors’ nerves. Officials have yet to provide details on where the tax will be levied or how large it will be.

Key moves:

• Shanghai Shimao Co.’s 3.6% yuan note due 2023 was halted after slumping 21% to 60.1 yuan. Xiamen Yuzhou Grand Future Real Estate Development Co.’s yuan bond due 2024 was suspended after sinking 22% to 45 yuan. Both were poised for their biggest declines on record.
• Kaisa’s dollar notes fell as much as 5 cents on the dollar and its shares tumbled to a record low. The company is China’s third-largest dollar debt borrower among developers, with more than $11 billion of dollar bonds outstanding.
• China Aoyuan Group Ltd. shares plunged more than 7% after Fitch Ratings cut its rating on the company by two notches to B+, citing the company’s lack of funding access, “large” maturities, and “high” leverage.

There was little sign of panic in China’s domestic financial markets. The CSI 300 Index of stocks was 0.9% higher, while the yuan rose 0.2% against the dollar.