China credit is showing signs of recovery after months of distress sparked by a property debt crisis, with the already better insulated onshore market improving further after defaults declined.
Authorities have been stepping in with more concrete measures to aid the real estate sector, following unprecedented mortgage boycotts, slumping home sales and mounting debt failures.
A key part of the support was a new scheme that emerged last month to provide state guarantees for bonds issued by a small group of developers. Longfor Group Holdings Ltd. and Seazen Holdings Co. were among the first to price such securities, while at least three others plan offerings.
Other policy tools rolled out last month included a larger-than-expected policy rate cut by the central bank and 1 trillion yuan ($144 billion) of economic stimulus unveiled by the State Council.
That all helped dial back the stress in the local credit market by one notch to level 2 in August, Bloomberg’s China Credit Tracker shows. The main driver was a drop in the volume of defaults in the onshore market to the lowest since February.
For the offshore market, stress remained at level 5. Chinese dollar bonds slid to record lows in early August, before rebounding in their strongest rally in a decade after the flurry of policy steps. That prompted some analysts to predict the market may have seen its bottom.
A number of successful offshore payments in August, including from developers Agile Group Holdings Ltd., Greenland Holdings Corp., and Central China Real Estate Ltd., also helped boost sentiment.
However, upcoming deadlines could remain challenging for some after developer sales plunged further in August. The sector also suffered its worst first-half earnings since 2008.
Outside the real estate industry, some long-term dollar bonds of one of China’s largest private-sector conglomerates, Fosun group, are indicated at about 40 cents. Other notes due next year are at about 85 cents. Generally in credit markets, note prices below about 70 cents on the dollar are considered distressed.
There was also a payment scare in late August from a local government financing vehicle in western China called Lanzhou City Development Investment Co. That development renewed concerns about the refinancing abilities in financially weaker regions. Analysts at S&P Global Ratings wrote that the last-minute payment by the LGFV was a ‘wake-up call’ for investors that contagion risks were rising for weaker local borrowers.
Debt-Repayment Tests
Monthly bond maturities for Chinese firms that face repayment pressure
A key focus for China’s broader credit markets in coming months will be whether policy makers roll out more supportive measures. Investors raised their bets on the property sector this week after several media reports pointed to signs of stronger policy support, with a growing number of Chinese cities relaxing purchase curbs to boost home sales.
Dive into the methodology behind Bloomberg’s China Credit Tracker
Officials from the nation’s top economic planning body have already pointed to the third quarter as being ‘crucially important’ to adopt supportive policies amid a struggle to recover from pandemic-related economic losses. A crucial Communist Party congress set for October will likely offer clues on the nation’s economic leadership.
Provincial Breakdown
Fujian province has the most onshore bond defaults
Note: Map shows Mainland China’s onshore market. Figures are in billion yuan. Source: Bloomberg
Creditors are also awaiting debt restructuring proposals from many of the defaulted developers. China Evergrande Group, which is facing a winding-up lawsuit, recently reassured investors that it would aim to deliver a restructuring plan as soon as possible after missing a self-imposed timeline in July.