China's campaign to reduce debt in sectors such as real estate has put many developers in a tight spot, sending high-yield bond prices tumbling
The latest Chinese market to buckle under pressure from Beijing’s wide-ranging corporate crackdown: junk bonds.of Asia’s roughly $300 billion high-yield dollar bond market, thanks to a surge in borrowing by the country’s heavily indebted property developers. But the investor optimism that drove that borrowing has collapsed.
The average yield of non-investment-grade U.S. dollar bonds from companies in China topped 14% in late July and early August, around 10 percentage points above the average yield of junk bonds issued by American companies, according to ICE BofA Indices.recently hit its widest level in a decade, showing how far prices of Chinese bonds have fallen relative to their Western counterparts. Bond yields rise when prices fall.
“A lot of the tension is focused on the property sector, and it’s really been driven by [China’s] policy,” said Sheldon Chan, an Asia credit portfolio manager at T. Rowe Price in Hong Kong. Cash-strapped Evergrande—one of the country’s largest real-estate companies and its biggest junk-bond issuer—to help fund the building of residential properties in many cities across China. In June, it reported the equivalent of $88 billion in interest-bearing debt onshore and offshore. The company has more than $16 billion in U.S. dollar debt outstanding, according to S&P Global. Some of its dollar bonds are trading below 50 cents on the dollar.
“It’s overdone,” said Aberdeen’s Mr. Lukaszewski, adding that the spread implies investors are expecting a 30% default rate. “This much negativity in prices is rare,” presenting an opportunity for investors who can figure out which companies will be able to weather the storm, he said.
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