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China's ICBC: HY property bonds attractive despite tighter spreads

China USD property credit spreads narrowed to 627 basis points in July. But ICBC said it continues to favour the HY segment, which continues to outperform IG, albeit by narrower margins.

China's ICBC: HY property bonds attractive despite tighter spreads

China USD property credit spreads are tighter than before, with spreads between high yield and investment grade bonds narrowing to 627 basis points in July. 

But China’s ICBC said it continues to favour the HY segment, which continues to outperform IG, albeit by narrower margins. 

The Markit iBoxx China USD property HY total return index rose 1.9% as of 30 July. In comparison, the IG index was up 1.4%, fixed income research analysts Angus To, Jasper Chow and Li Yue said in note. 

‘Although credit spreads between property HY and IG narrowed to 627bps in July, there is room to further tighten since it is still higher than the three-year average of 525bps.

‘Given the promising recovery in China’s property sales and financing environment, we believe the risk rewards of property HY bonds are still relatively attractive,’ they added.

Positive indicators

ICBC said the bulk of property developers it tracks – 24 out of 30 to be exact – saw improved sales in June.

Leading performers Yuzhou, Greentown and Fantasia saw their sales improving by 50.5%, 33.8% and 32.9% respectively from a year earlier.

Meanwhile, Shenzhen’s recent wave of restrictions to curb soaring property prices will affect developers with large exposure there, namely Kaisa and Logan, the bank noted.

‘However, we believe that only the cities with overheating property market and higher home price growth would be more likely to unveil further restrictions given the city-specific policy implementation.

‘This new wave of property regulations had limited impact on property bonds as their prices remained steady,’ the analysts said. 

In fact, China USD property bond issuance has continued to recover, helped by improved market conditions.

Developers issued $5.8bn in Chinese property HY bonds in July, that accounted for 73.3% of total property issuance. They issued $6.07bn of these bonds between May and June.

Over in the IG space, developers issued $1.3bn in offshore property bonds. ‘In light of overall buoyant sentiment and sales recovery, USD property bonds, especially property HY, will be highly sought after by the market.

‘Property developers will continue to tap the offshore market to fulfil their refinancing needs in the next 12 months as property bond maturities stay high until the second quarter of 2021,’ ICBC’s analysts said.

Differing views

Some banks share these sentiments. Swiss giant UBS has a preference for BB-rated Chinese property bonds, that are expected to return over 7% in a six-month timeframe. 

Deutsche Bank’s wealth clients have also piled into these bonds since the Covid-19 outbreak. ‘On a selective basis, we would recommend having a closer look at this segment,’ Europe and Asia CIO Tuan Huynh told journalists in July

But the JPMorgan China Opportunities fund is keener on the IG space. The fund, which was launched in January, is managed by Shaw Yann Ho, Julio Callegari and Jason Pang.

In an earlier interview, Ho told Citywire Asia that the $20.76m fund allocates over 50% of the portfolio to investment grade bonds and has an average credit quality of BBB.

‘We see limited fallen angel risk for China investment-grade corporates,’ JP Morgan Asset Management’s head of Asia fixed income said

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