China Insight: Property Bonds See Decreasing Net Supply From Now On

Both Chinese property stocks and bonds were doing well in Q4 last year due to an increase in home mortgage loans in percentage terms in the banking sector's aggregate loan portfolio (chart 1). This is largely attributed to a recovery of home demand.

Against this backdrop, a number of Chinese property developers rushed into the offshore USD market for debt issuance as soon as the new year started. However, that does not mean we will likely see an increase in net supply of offshore USD bonds from this sector this year.

In July last year, NDRC announced that property developers are only allowed to issue offshore bonds to replace existing medium- and long-term offshore bonds due within one year. Due to this constraint, the forthcoming bond issuance will be mainly for refinancing only without increasing the net supply. Therefore, we expect the net supply will drop this year if the prevailing tight financial supervision remains in place. Gross supply will remain huge not only this year but also in the following two years, which however is due largely to the huge amount of maturities poised to be refinanced (chart 2).

With regard to yields, we think they in general still look friendly to investors. Given the dampened willingness to acquire land, funding demand from the property sector is starting to ease. As a result, the overall funding cost of this sector will be easing gradually. Unless an unexpected liquidity crunch happens again, there should be more downside than upside risk for offshore Chinese property bond yields exposed to over the next eleven months. In chart 3, the notable fall in bond yields over the past one month should be attributed to this factor to a certain extent. With global interest rates trending downward, high-yield bonds with decent credibility will continue to be heavily-demanded. That, combined with the above said constraint, high-yield issues from Chinese property developers will become particularly scarce.

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