With incremental policy easing in China’s property sector, we believe that the housing market is likely to stabilise. The Premia China USD Property Bond ETF (HKEX:9001) provides a pure-play exposure to China property bonds, which are likely set for a better year in 2022.
- Yeo Hui Shi | Published on 21 Jan 2022
- Over the last few months, supportive policy fine-tuning has been rolled out in China’s property sector so as to avert a systemic crisis and stabilise the housing market.
- We expect policy fine-tuning to continue into 2022, which is likely to alleviate some of the credit stress faced by developers. With potential spillovers likely to be ring-fenced, we think China property bonds are set for a stronger year.
- Following the dramatic sell-off in 2021, we believe that investors have priced in a large degree of credit stress. Spreads of China property bonds have reached one of the highest levels on record.
- The Premia China USD Property Bond ETF (HKEX:9001) provides investors with a diversified exposure to secured and senior unsecured, rated China USD property bonds, at a yield-to-worst of approximately 27%.
Embattled by tighter regulations, such as restrictions on bank lending and limits on how much developers can borrow, the Chinese property sector saw turbulent times in 2021.
China Evergrande (HKEX:3333) was the first major property developer to succumb to the tightened regulations. The liquidity crunch at Evergrande had sent ripples across the Chinese property sector, which accounts for over 20% of the Asian high yield bond market. Some developers including Shimao Group (HKEX:813) were hit by downgrades, while defaults at developers have also accelerated.
With signs of financial distress shown by major developers, buyers’ sentiment has dampened due to concerns over potential delays in the delivery of housing projects. New housing prices in 70 major cities continued on a downtrend in December 2021, falling by -0.2% month-on-month.
China property is set for a better year in 2022
The rapidly deteriorating conditions in the property sector has caught the attention of regulators, who have now taken a step back. Over the last few months, supportive policy fine-tuning has been rolled out in order to avert a systemic crisis in the property sector and stabilise the housing market.
In late 2021, we saw regulators telling banks to speed up mortgage approvals. At the same time, developers could resume the issuance of asset-backed securities, along with a relaxation of limit on new interbank bond issue.
At the local government level, some cities such as Harbin and Chengdu have relaxed restrictions on access to pre-sales fund, allowing developers to gain access to part of the cash proceeds held in escrow bank accounts.
Efforts to stabilise the property market continued on as we move into 2022, with regulators instructing banks to step up lending to developers for the first quarter of this year. Additionally, in a bid to encourage the acquisition of assets from distressed developers, borrowings that are used to fund mergers and acquisitions (M&A) will no longer be counted towards the Three Red Lines.
Moreover, China aims to ease the restrictions on access to pre-sales funds nationwide as early as end-January 2022. Pre-sales, which comes in the form of deposits and advanced payments, is a crucial source of funding for developers (Figure 1). The relaxation of restrictions on access to pre-sales, hence, could ease liquidity pressures.
Figure 1: Pre-sales is the largest primary source of funding for developers
At the current juncture, there is a lack of details regarding how the central government will go about implementing this new rule. Sources obtained by Reuters mentioned that developers could use escrow funds to complete unfinished buildings first, and then for other purposes.
Regardless, we expect the fine-tuning of policy to continue in the near-term, which are likely to be supportive of property sales as well as access to funding, thus alleviating some of the credit stress faced by developers. Therefore, we believe that the incremental policy easing will be a key near-term catalyst for the recovery of China’s property sector.
Value is emerging in the sector
Following the dramatic sell-off in China property and Asian high yield bonds in 2021 (Figure 2), we believe that investors have priced in a large degree of credit stress. Coupled with an incremental policy easing that paves way for a recovery, the sector likely offers attractive risk-adjusted returns.
Figure 2: China property and Asian high yield bonds have tumbled
Valuations-wise, the spread level of China property bonds has widen to approximately 2590 basis points (bps), which is one of the highest levels on record (Figure 3). Relative to US high yield, China property bonds offer a spread difference of a substantial 2290 bps, suggesting that they offer a significant value.
Figure 3: China property bonds provide attractive pick-up
Additionally, much like the rest of the Asian high yield bond sector, China property bonds offer a combination of higher yield and shorter duration as compared to global peers.
As illustrated in Table 1 below, China property bonds have a yield-to-worst of 27.4%, which compares favourably to other USD-denominated bonds across the world. This comes alongside an effective duration of just 2.8 years, meaning that every 1% change in yield will only have an approximate 2.8% price change in the opposite direction. As a result, China property bonds provide one of the highest yield per unit of duration.
Table 1: Yields and durations across various global credit segments
| Segment | Yield Per Unit of Duration (%) | Yield-to-Worst (%) | Effective Duration (years) |
| China Property USD | 9.9 | 27.4 | 2.8 |
| Asian HY | 3.6 | 11.6 | 3.2 |
| US HY | 1.2 | 4.7 | 3.9 |
| European HY | 1.0 | 3.1 | 3.3 |
| Asian IG | 0.5 | 2.8 | 5.8 |
| US IG | 0.3 | 2.1 | 6.8 |
| European IG | 0.1 | 0.6 | 8.1 |
| Source: Bloomberg Finance L.P., iFAST CompilationsData as of 20 January 2022 |
This makes China property bonds more compelling against the current backdrop of impending Fed rate hikes, which are likely to have a greater impact on global peers with lower yields and longer durations. Besides, on 20 January 2022, China has cut the key mortgage rate for the first time in almost two years (i.e. since the peak of the pandemic). With the cost of credit lending kept at lower levels, homebuyers would be encouraged to re-enter the housing market, lending some support to the property sector.
Premia China USD Property Bond ETF (HKEX:9001)
Investors can certainly consider active products, such as our recommended Eastspring Investments – Asian High Yield Bond ASDM SGD-H, in order to ride of the recovery of the China property sector. Nonetheless, those with stronger risk appetite could go for products that provides a pure-play exposure to the China property bond market.
Currently, only ETFs provide such exposure. Specifically, the Premia China USD Property Bond ETF (HKEX:9001) is the only product available in the market which holds a diversified basket of China USD property bonds.
It is worth highlighting that the ETF holds secured and senior unsecured, rated offshore USD debt securities issued by China property developers and REITs. Such securities are likely to offer better recovery prospects in the event of a default. This is differs from Asian high yield bond funds or ETFs, where the bonds can be senior or subordinated, are typically unsecured, and may be unrated.
The Premia China USD Property Bond ETF has higher credit rating of Ba2, versus that of B2 and Ba3 respectively for the iShares USD Asia High Yield Bond ETF (SGX:O9P) and the Eastspring Investments – Asian High Yield Bond Fund (Table 2). Despite the higher average quality, the Premia China USD Property Bond ETF still offers a higher yield-to-worst, suggesting a substantial amount of value.
Table 2: Comparison of HKEX:9001 with Asian high yield bond ETF/fund
| Premia China USD Property Bond ETF (HKEX:9001) | iShares USD Asia High Yield Bond ETF (SGX:O9P) | Eastspring Investments – Asian High Yield Bond Fund | |
| Average Quality (Moody’s / S&P) | Ba2 / BB | B2 / B | Ba3 / BB- |
| Yield to Worst* | 27.4% | 11.6% | 25.8% |
| Effective Duration* | 2.8 | 3.2 | 2.4 |
| Number of Holdings | 53 | 346 | 306 |
| Management Fee | 0.58% | 0.50% | 1.00% |
| *Referenced from the Bloomberg China USD Credit Liquid HY IndexSource: Bloomberg Finance L.P.Data as of 20 January 2022 |
All in all, with incremental policy easing in the near term, we believe that potential spillover effects in the China property sector are likely to be ring-fenced. This also suggests that risks in the sector are likely to be idiosyncratic in nature, rather than systematic. The Premia China USD Property Bond ETF (HKEX:9001) would help investors to stay diversified, given the exposure to different issuers (Table 3).
Table 3: Top 10 holdings by issuer group
| Name | Weight* |
| Sunac China | 5.6% |
| China Vanke | 4.6% |
| CIFI Holdings Group | 4.5% |
| KWG Group | 4.4% |
| Guangzhou Yuexiu Group | 4.4% |
| Greenland Holdings Corp | 4.4% |
| Powerlong Real Estate | 4.3% |
| Country Garden | 4.2% |
| Yanlord Holdings | 4.2% |
| Road King Infrastructure | 4.1% |
| Total | 44.7% |
| *Issuer group is capped at ~5% to limit drawdown riskSource: Premia PartnersData as of 20 January 2022 |
Looking into the longer term, we believe China’s stance of deleveraging the property sector remains unchanged. The focus on raising cash to deleverage is likely to help the sector emerge stronger from the crisis. This would undoubtedly be a positive for bondholders in time to come.