High-yield dollar-denominated bonds of companies such as Powerlong Real Estate Holdings and Country Garden Holdings have rallied since late November, cheered by the Chinese central bank's and banking regulator's 16 steps to support the ailing sector.
Those measures, which include loan repayment holidays, have instilled hopes that the regulatory squeeze and liquidity crunch that have beset the industry since mid-2020 will ease.
Still, the rally has been narrowly confined to a handful of bonds whose issuers announced plans to boost their capital. Foreign investors are staying away.
"It remains challenging for Chinese property bond issuers to attract a sustained period of inflow like they did in the past," said Alessandro Zhu, Asia fixed income portfolio manager at CSOP Asset Management. "There is not enough fundamental data to attract significant allocation from global asset managers."
Prices on Powerlong Real Estate Holdings' dollar bonds have rallied in the days after the steps were announced, in particular after sources told Reuters China's central bank will offer cheap loans to financial firms to buy developers' bonds.
Powerlong said it had signed an agreement with Shanghai Rural Commercial Bank for a 5 billion yuan ($716.69 million)credit line.
Powerlong's $535 million 2025 bond, that pays 5.95%, has seen spreads tighten to around 5,700 basis points on Wednesday from above 12,000 points over comparable U.S. Treasuries on Nov. 28
Yet, even at these levels the bond trades at spreads 10 times the levels seen in mid-2021, and while yields have fallen from 115% to 70%, they are a long way from the 5% yield early in 2021.
China bond funds denominated in foreign currencies drew just $20.06 million for the 11 months this year, after seeing outflows in 2021, data from Morningstar shows.
Asia Pacific high yield dollar bond funds witnessed outflows of $2.45 billion during January to November 2022, compared with inflows of $11.33 billion in the same period last year.
Mainland property sales remained weak in October, as prices in 100 cities dropped for a fourth month.
Chinese bonds comprise a quarter of emerging market offshore corporate bonds. The ICE BofA China high-yield dollar index has returned 11% so far this month, compared with an almost flat return on the China investment grade index.
Country Garden Holdings has seen the price of its $1 billion 2025 dollar bond, which pays 3.125% coupon, surge to 55 cents on the dollar from less than 10 cents in November, after the developer said it planned to raise capital through a share placement to refinance offshore debt.
The rally is expected to be bumpy though, with analysts at Citi expecting further defaults, particularly among those rated lower than single-B. Credit rating agencies define high-yield bonds as those rated below "BBB-" or "Baa3".
But "as China begins to more fully reopen, the recovery in sales could have better prospects," Citi said.
($1 = 6.9765 yuan)
(Reporting by Georgina Lee; Additional reporting by Gaurav Dogra in Bengaluru; Editing by Vidya Ranganathan and Sam Holmes)
By Georgina Lee