Property Developer Bond Slump Deepens in China

The selloff in Chinese property dollar bonds intensified on Thursday amid signs of cracks emerging in the nation's much larger onshore market.

Kaisa Group Holdings led declines in the nation's offshore bonds as a financial product it guarantees missed a payment, while Shimao Group Holdings's 4.75% dollar note due 2022 was poised for its biggest drop on record. China's dollar high-yield debt fell for the 10th day in 11 after yields climbed above 21%. Trading was halted in two yuan bonds after they plunged more than 20%.

China's property firms are caught in a vicious circle where surging borrowing costs make refinancing upcoming maturities prohibitively expensive, thereby triggering further losses in their bonds as traders price in potential haircuts. A slowing property market and strict rules on leverage are adding to their challenges, while credit assessors are downgrading the industry's companies at the fastest pace on record.


"The massive rating downgrades and lack of substantial easing of property curbs triggered the plunge in domestic bonds," said Zhijun Zhang, chairman of Beijing Dingnuo Investment Management Co. "Concerns are growing about an increasing number of private developers, especially after the dramatic sales slowdown."

Residential prices fell for the first time in more than six years in September, while the rate of land parcels left unsold surged to the highest since at least 2018.

So far the turmoil has been largely limited to China's offshore bonds. Any evidence contagion is spreading to the nation's $12 trillion domestic credit market may prompt policymakers to take action to avoid a potential cash crunch. The central bank, which at the end of October injected almost 1 trillion yuan ($156 billion) into the banking system, has been draining liquidity this week.