25 October 2016
Investors have an alternative asset class available to them in the form of bonds issued by mainland developers. Photo: CNSA
Investors have an alternative asset class available to them in the form of bonds issued by mainland developers. Photo: CNSA

Mainland developers shine in bond market

While the stock market is suffering, mainland real estate firms are providing investors with numerous opportunities in the bond market.

Benefiting from the opening up of the mainland bond market, a Chinese developer is allowed to issue bonds in the mainland worth as much as 40 percent of its net assets.

A pool of 108 monitored real estate firms raised a combined 1.36 trillion yuan (US$210 billion) from the market last year, double the amount raised in 2014.

About 54 percent of the total was raised using instruments like bonds and notes.

This year, more mainland developers are set to issue bonds.

In the first two weeks of the year, they have announced bond issuance plans worth a combined 92 billion yuan.

Their financing costs are also improving.

Since the beginning of the year, many such issuers have been offering only 3 percent interest on bonds.

The mainland developers’ activity in the bond market is backed by supportive policies for the real estate sector.

Since 2009, every time the central bank cut interest rates, home prices and transaction volumes have increased.

In 2009, mainland home prices increased 35 percent, and monthly sales volumes rose 98 percent.

In 2012, home prices went up 21 percent, and sales volumes rose 55 percent.

I expect the mainland government to launch more incentives for the sector.

While more investors are starting to favor the onshore bond market, some worry it will have a negative impact on the offshore bond market.

However, we believe mainland developers need various financing channels to fulfill their offshore refinancing demands.

Meanwhile the decreasing supply of Chinese developers’ US dollar-denominated bonds in overseas markets will support those bonds’ prices.

Moreover, mainland developers are still dominant players in high-yield bonds in the Greater China markets.

At the end of December, 66 percent of the high-yield bonds on the J.P. Morgan Asia Credit Index were issued by developers, which means mainland developers’ offshore bonds are welcomed by investors.

At present, the supply is limited, but the demand of investors for income-generating investment products has been rising.

It will provide strong support for the bond market.

But, influenced by the weak macro economy, the valuation of various assets will fall back to attractive levels, and returns from bond investments will remain in a reasonable range.

This article appeared in the Hong Kong Economic Journal on Feb. 17.

Translation by Myssie You

[Chinese version 中文版]

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Managing director of retail division at Value Partner

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