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Bond Market Insights - Thurs, 1 Sept 2022

The crackdown on China’s overleveraged property developers began in 2020 and has resulted in around $37bn of defaults in the offshore market. Despite the slew of appalling financial results emerging in the sector, with Country Garden, the largest builder by sales, posting a record 96% drop in first-half profit, some are insisting that the bottom of the market is now in place, with several state-led initiatives aiding the recovery.

In mid-August the PBOC unexpectedly cut the policy rate, then there was an announcement that that the government would offer special loans through policy banks to ensure property projects completed. China also announced a CNY 1tn stimulus package ($145 billion).

These were coupled with a plan to help a select group of developers sell onshore bonds with full state guarantees, proceeds to be allocated to overseas debt payments. CIFI Holdings and Country Garden bonds have rallied more than 20 points from the lows.

The recovery continued on Wednesday with Country Garden, Sino Ocean Land and CIFI up 2-3pts on month end buying aided by news that CIFI is doing a share placement. Agile, Central China and the distressed sector were pretty much unchanged.

In China IG TMT outperformed, led by BABA on headlines regarding US-China talks. The 10yr was 7bps tighter. Chip manufacturer TSMC was also strong, tightening 5-7bps. A bit of a quality bias in LGFV’s. Lower quality names continue to be impacted by Lanzhou City Development. Moody’s said that Lanzhou recently failed to make payments on trust debts, a fresh reminder of the state of local governments’ finances. It is difficult to find offers in the higher quality names.

China IG has started the month soft, following some selling of quality China names overnight in NYC. Non-China stock markets traded lower this morning. Taiwan was weighed down by semi-conductors, which also impacted Japan, along with oil. Materials weighed on the Australian market after the commodity growth related sell off overnight. China outperformed, with gains in energy, Shaanxi Coal Industry Co. +8.4%

HY Property bonds saw better selling this morning in high price bonds, better buying in bonds priced in the $20-40 range.

Sri Lanka, had a knee jerk rally yesterday after the IMF news, but saw better selling into the higher levels, which were +4pts at one time. This morning it has settled about +1pt from the pre news level.. PKSTAN continues to drift lower, sliding another 2pts lower today driven by the longer end,, the front end is supported by dealers shorts. MONGOL saw some RM selling overnight and is 0.5-1pt lower.

China will conduct its biggest Covid lockdown since Shanghai starting from 6 p.m. local time today. Chengdu's 21 million residents will need a negative test to leave the city and families will be allowed to send only one person out, once per day, for groceries. The city said the measures will be in place indefinitely.


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