China junk-bond bargain hunters trigger 388% surge in ETF assets

Firms including Allianz Global Investors and Axa Investment Managers say they are looking to increase their holdings, joining Goldman Sachs Asset Management and Oaktree Capital Group.

SINGAPORE: One exchange-traded fund (ETF) shows how investors are increasing bets on a rebound in Chinese property junk bonds.

Surging inflows have lifted total assets of the iShares USD Asia High Yield Bond Index ETF to US$1.87bil (RM7.81bil) from US$383mil (RM1.58bil) at the end of August, an increase of 388%.

In October alone, the fund attracted a record US$773mil (RM3.21bil). Some 29% of the Singapore-listed ETF’s holdings are in real estate, including notes issued by China Evergrande Group and Sunac China Holdings Ltd.

While much of the buying was early – the ETF fell to a low on Nov 9 – Chinese developer bonds have climbed in recent days amid signs the government is taking steps to limit contagion in the property sector.

Firms including Allianz Global Investors and Axa Investment Managers say they are looking to increase their holdings, joining Goldman Sachs Asset Management and Oaktree Capital Group.

The tide may be turning for China’s property sector, said David Newman, who helps manage about US$3bil (RM12.53bil) as chief investment officer for global high yield at Allianz Global Investors.

“We have begun to buy a few higher quality, lower price bonds for our global portfolios, reducing a long-term underweight.”

Government efforts to ease funding conditions for the nation’s property sector have focused on higher-rated firms. Authorities are fine-tuning a crackdown on the industry to avoid a systemic liquidity crunch and ensure social stability, according to bankers and regulators who’ve been briefed on the changes.

The yield on a gauge tracking Chinese dollar junk bonds has fallen to about 20% from a peak of almost 25% on Nov 9. There’s been no defaults by developers since authorities told firms at a meeting Oct 26 they need to meet their debt obligations. At least four companies defaulted earlier that month.

Jim Veneau, head of fixed income Asia at Axa Investment Managers, said the firm’s Asian high-yield fund has more of a focus on China property developers, though repositioning back into risk will be done cautiously and gradually.

“The risk levels re-adjust almost daily depending on asset sale developments and policy clarifications, this is a tricky balance as derisking can end up decapitalising a fund,” Veneau said. His firm manages about US$3.3bil (RM13.79bil) in Asian fixed income, of which around US$400mil (RM1.67bil) is in Asian high yield.

There’s plenty of risk still around. S&P Global Ratings said this month it expects more defaults by property firms next year, as contracting profit margins restrict cash inflows, while the credit crunch exacerbates refinancing risks.

Builders also have a total of US$13.4bil (RM55.99bil) of dollar bonds and the equivalent of US$12.6bil (RM51.40bil) in yuan notes coming due in the first quarter, according to data compiled by Bloomberg.

Property firms are stepping up efforts to raise cash, given elevated borrowing costs continue to make refinancing via the offshore bond market prohibitively expensive.

In recent days, Evergrande announced a stake divestment in HengTen Networks Group Ltd, the controlling shareholder of Sunac provided US$450mil (RM1.88bil) of his own funds in the form of an interest-free loan, while Country Garden Services Holdings Co unveiled its second share placement in six months. — Bloomberg

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