China property bonds’ road to recovery fraught with risks amid drawn-out restructurings, gloomy sector outlook, and volatile markets
- Investors in global bonds from China’s property developers should brace for a bumpy ride on account of uncertain cash flows and unpredictable restructuring outcomes
- Macroeconomic risks also cloud the outlook as concerns remain about a US recession, tighter liquidity in developed markets, and a potential banking crisis
Battered Chinese property bonds have a long way to go before they recover from the mauling they received in the aftermath of Beijing’s “three red lines” policy, because of risks like drawn out restructurings, uncertain cashflows, and tectonic shifts in the sector, Allianz Global Investors’ top fixed income official in Asia-Pacific warned.
The gloomy outlook is exacerbated by the expectation of sustained volatility in global financial markets, which would force investors to focus on risk control rather than attempt opportunistic, short-term trades, said Jenny Zeng, AllianzGI’s chief investment officer for fixed income in Asia, who oversees US$6 billion in assets.
“Market sentiment around Chinese property US dollar bonds remains fragile … in the near term it may not necessarily be a good place to allocate risk,” she said. “You would want to lower your overall [portfolio] volatility.”
The rally in China’s property bonds, which comprise the bulk of the outstanding junk-rated dollar bonds in Asia, has already lost steam.
