Fund managers avoid Chinese real estate bonds due to default risks

A man walks past screens displaying stock information at a brokerage in Jiujiang, Jiangxi province, China October 8, 2018. REUTERS/Stringer

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Sep 2 (Reuters) – Fund managers are cutting their holdings of Chinese property bonds by half or more as the sector swings from crisis to crisis and sends asset managers’ performance skyrocketing.

According to data from Refinitiv, 204 of 242 dollar-denominated bonds issued by Chinese property companies are trading well in troubled territory below 50 cents on the dollar, hammering funds and limiting patience to wait for a rally.

Chinese bond prices

As angry buyers of unfinished apartments boycott mortgage payments, home sales and prices drop, and bailout efforts have so far done little to ease developers’ cash crunch, many are choosing to reduce their losses.

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The five largest Asian high-yield funds reduced their holdings of Chinese property bonds to 16.4% at the end of June, from 27.6% at the end of last year, according to Morningstar.

The BGF Asian High Yield Bond D2 USD fund, for example, reduced its exposure to Chinese real estate bonds to 14.7% at the end of June from 27.1% at December 31.

PIMCO stocks GIS Asia High Yield Institutional USD and Fidelity Asian High Yield A-Acc-EUR also reduced their holdings to 11.9% and 22% from 22% and 31.7%, respectively.

“As the liquidity crisis worsens…many people are now hesitant to hold on to their real estate bonds,” said Kunal Sawhney, chief executive of research firm Kalkine Group.

“Even major institutional investors are reducing their positions in Chinese dollar high yield bonds as investor confidence begins to wane since the onset of the crisis.”

Maturity by quarter of dollar-denominated bonds issued by Chinese real estate developers

Patrick Ge, research analyst at Morningstar, said a combination of weaker bond supply and defaulted bonds falling out of indexes also contributed to the reduction in holdings of Chinese property bonds.

“We have seen several managers diversifying away from Chinese real estate and finding opportunities in other high yielding Asian sectors such as Indian renewable energy companies and the Indonesian real estate space,” he said. .

Holdings of Chinese real estate bonds in Asian high yield funds

Offshore bonds have fallen 59.4% on average this year and Bank of America has calculated a total of $52 billion in defaults. Exposed mutual funds suffered heavy losses.

China’s property developers’ biggest bond defaults this year

The UBS (Lux) BS Asian High Yield $K-1-acc fund has fallen 29% this year, while HSBC GIF Asia High Yield Bond XC and Fidelity Asian High Yield A-Acc-EUR have lost around 24% and 21 %, respectively.

Dollar-denominated bonds issued by Chinese property developers

In its effort to revive the economy, China has cut its benchmark lending rate and officials have repeatedly pledged additional aid. Read more

However, analysts said that real financial support for developers is limited and that without a recovery in market confidence, they will not be able to solve cash flow problems.

“We need to see a recovery in pre-sales and subsequently a reopening of the capital market to conclude if there is an upturn in the sector,” said Agnes Wong, head of credit strategy APAC at BNP Paribas.

She, however, said it would be hard for things to get any worse. “We see limited downside from here,” she said.

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Reporting by Patturaja Murugaboopathy and Gaurav Dogra in Bengaluru; Editing by Tom Westbrook and Subhranshu Sahu

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