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Chinese property developers’ broken promises erode investor confidence

Since last summer, when the financial troubles of China Evergrande Group sparked a selloff in the giant property company’s bonds and those of its peers, the market has remained deeply distressed, with no end in sight to the malaise. A string of easing measures from Chinese authorities, local governments and banks to support the housing market and help developers access funding onshore have so far done little to change the mood in the market. China’s top 100 developers’ monthly contracted sales volume fell for the eighth straight month in February, plunging 47% from a year earlier, figures from Chinese data provider CRIC showed.

For much of the past five months, the average yield on Chinese developers’ dollar bonds has been above 20%, making it too expensive for most companies to raise fresh funds to pay off maturing debt. To complicate matters, several developers that earlier claimed to have ample liquidity to repay their debts surprised investors by reneging on their statements without warning, damaging bondholders’ already-fragile confidence in the transparency and truthfulness of companies’ disclosures.

“Trust takes time to build but takes just one step to destroy,” said Freddy Wong, head of the Asia-Pacific region for Invesco’s fixed-income business. Investors were willing to lend to developers that deliver on their promises, but once that trust is broken, it would be “almost impossible” to mend, he said.

Since the beginning of 2021, Chinese developers have defaulted on $8.8 billion of offshore dollar bonds and the equivalent of $5.1 billion of onshore yuan-denominated bonds, dwarfing the total amount of defaulted bonds in previous years, according to Fitch Ratings.

The latest negative surprise came from a small Chinese developer called Zhenro Properties Group Ltd. Foreign investors were caught off guard in late February when the Shanghai-based company U-turned on an early-January promise—laid out in a Hong Kong stock-exchange filing—to redeem a $200 million perpetual bond on March 5. Zhenro also assured investors that it had the equivalent of a $1.4 billion credit line from Bank of China, a large state-owned lender.

All seemed well until online speculation bubbled on Feb. 11 that Zhenro wasn’t going to redeem the bond as planned. Amid a deep selloff in its shares and dollar bonds, the firm publicly dismissed the rumor as “untrue and fictitious” via another exchange filing. Days later, Zhenro asked investors for consent to delay the redemption by a year. Its perpetual bonds were recently bid at 22% of their face value, versus more than 92% on Feb. 9, according to Tradeweb data.

Some investors have compared Zhenro’s sudden shift last week with an October 2021 incident when Chinese luxury developer Fantasia Holdings Group Co. defaulted on a dollar bond shortly after a company representative told some bondholders that it planned to repay the debt.

Two weeks before the default, Fantasia had also said in a stock-exchange filing that it had “no liquidity issue.” That bond’s price, which had been 99 cents on the dollar a day before its maturity date, immediately plunged to around 22 cents and sparked a selloff in property bonds.

Several other developers also backtracked on plans to redeem their bonds in recent months. Before Evergrande entered into a downward spiral last summer, the property giant had also repeatedly stated that its operations were normal and that it had never missed an interest or principal payment on its dollar bonds. It skipped interest payments in September and defaulted on some offshore debt in December.

Investors have now adopted a “sell first and think later” mentality and are extremely sensitive to rumors, said Iris Chen, a credit analyst at Nomura. The thinking is that even what companies say in regulatory filings doesn’t ensure that the firms will stick to their pledges.

The other big problem is off-balance-sheet liabilities that several developers didn’t disclose earlier to investors or credit-rating companies. The hidden debt has included guarantees on wealth-management products or private loans.

The troubles at Shimao Group Holdings Ltd., which used to be one of only a few Chinese developers with investment-grade ratings from major rating firms, show how rapidly a company’s liquidity situation can change. Late last year, S&P Global Ratings and Fitch Ratings downgraded Shimao to speculative grade, due to what they said were deteriorating business conditions. Further cuts followed, as the bond market’s dislocation increased the company’s refinancing risk.

Then in January, investors became unnerved by media reports that Shimao had missed payments on trust loans that weren’t disclosed previously, and its dollar bonds tumbled to distressed levels. Shimao subsequently said two of its subsidiaries had provided guarantees to a borrower that took out a trust loan, and the situation was being worked out.

Despite Shimao’s efforts to dispel investors’ concerns, sell assets to raise cash and drum up home sales, its dollar bonds have tumbled to below 30 cents on the dollar last week from nearly par in early November, according to data from Tradeweb.

In past years, broad selloffs in Chinese developers’ bonds were often followed by quick snapbacks and large price rebounds for many firms, rewarding bottom-fishing investors that had conviction about the long-term prospects of the country’s property sector and its eventual recovery.

That hasn’t happened this time. None of the 42 Asia or China high-yield bond funds tracked by Morningstar had positive returns in the past three months, and virtually all of them have been down in the past year.

UBS Asset Management’s Hong Kong-domiciled $180 million China high-yield bond fund—the worst performer among the 42 funds—suffered a 21% loss in the past three months and nearly 40% in the past year. The group of Asia and China high-yield funds had more than $2.9 billion in inflows during the fourth quarter, according to Morningstar data.

“One year later when we look back, we may think we were overreacting, but right now the contagion effect is kind of big within the sector,” said James Wong, executive director and a fixed-income portfolio manager at GaoTeng Global Asset Management.

The best thing that can restore investors’ confidence is seeing developers’ sales and operational cash flow improving. “Other than that, whatever they say or do will not solve the fundamental problem,” said Frank Zheng, head of international fixed income at China Asset Management Co.

No company can afford to stay in business with monthly sales dropping some 40%, zero external funding, and a wall of looming debts, he said. “The situation in the Chinese property market now is worse than most people predicted at the beginning of the year.”

This story has been published from a wire agency feed without modifications to the text

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