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Real Estate Woes Mean China Has New Locus for Credit Stress

Rebecca Choong Wilkins and Molly Dai
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Real Estate Woes Mean China Has New Locus for Credit Stress

(Bloomberg) -- Rising risks faced by property developers has led to a shift in the locus of stressed corporate debt in China.

Guangdong-based firms now have the highest amount of stressed dollar bonds in China, with almost $16 billion of notes yielding at least 15%, overtaking their Beijing-based peers for the first time at least this year. The change came after four developers based there made it to the growing list of bonds trading at stressed levels this week.

Real estate firms, which historically enjoyed easy access to the primary market, borrowed record volumes of debt in the last two years and make up over a third of China’s outstanding junk bonds. Concern over the sector is now growing as the pandemic pummels profits across the nation.

Click here to see Guangdong firms among this week’s list of stressed traded bonds

“The China dollar market has been indiscriminately penalizing, in particular, high yield bonds during March,” said Judy Kwok-Cheung, Hong Kong-based director of fixed-income research at Bank of Singapore Ltd. “Understandably, during times where the market is closed, immediate refinancing of USD bonds becomes more difficult that pushes the perceived default risk higher.”

To be sure, Guangdong’s rise to the top spot doesn’t necessarily mean a concentration of risk in the province itself as developers tend to have nationwide exposure. Instead, it indicates increasing caution over a sector which faces a $22.5 billion debt wall this year. Surging premiums offshore have already driven some builders to seek cheaper borrowing costs at home.

More broadly, there are signs of strain cropping up in the offshore market. Premiums on riskier dollar bonds have soared to eight-year highs this week, according to a Bloomberg Barclays index.

Last week, the value of Chinese corporate debt trading at stressed levels touched $48.4 billion, the highest level since Bloomberg started compiling the data from March 2019.

(A previous version of this story corrected the name of the province in the first paragraph.)

(Updates throughout.)

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