The Malaysian Reserve

They’re whispering the d-word in Asia’s junk market


Country Garden Holdings Co has a message for Asian debt junkies — the party’s over. China’s largest real estate developer may need to return to the dollar bond market after suspending a planned 20 billion yuan (RM12.36 billion) sale on Tuesday.

The firm, no stranger to the offshore world, already squeezed in US$850 million (RM3.39 billion) of issuance in January, just before a worldwide sell-off.

This isn’t good news for the region’s junk-rated issuers. The spread over their US peers widened this month, and investors are now asking for an average 6.8% yield, from as low as 5.1% in January.

There are casualties across Asia. The 2022 and 2026 bonds of PT Lippo Karawaci Tbk, an Indonesian developer, tumbled 6.7% and 13.8% respectively this year, matching the dismal performance of China’s Kaisa Group Holdings Ltd, which has a history of defaults.

The US Federal Reserve is not entirely to blame; after all, the US 10-year Treasury yield stabilised below 3% recently.

Actually, it’s China’s fault: Non-investment-grade issuers from the mainland have already raised more than US$30 billion, following a record US$77 billion last year.

China Inc now has half the weighting of the Bloomberg Barclays Asia USD High-Yield Bond Index.

So, if China sneezes, the rest of Asia gets sick. Global fund managers hesitate to deviate substantially from their benchmarks; the most likely action is fleeing the asset class altogether.

Already, in the last month, global funds pulled more than US$5 billion from emerging-market bonds, data provided by Jefferies Group show.

And it looks like China may be catching something worse than a little cold: The feared D-word is being whispered.

Beijing has already allowed China Energy Reserve & Chemicals Group Co (which counts state oil behemoth China National Petroleum Corp as a major stakeholder) to default, as well as a financing vehicle in Inner Mongolia.

Will the authorities blink if private-sector enterprises miss their obligations? China is now on track to achieve an unhappy annual record. There have already been 19 bond defaults this year, totalling US$3.1 billion.

The nation’s real estate developers are ready to flood the market because liquidity is so tight back home.

According to CLSA Ltd, even big property companies are being charged 20% above the benchmark lending rate, with smaller firms facing a 60% to 80% penalty, if they can get funding at all.

Some must fall back on three- to six-month bridge financing at an 18% annual rate.

China’s government could halt this disruptive force if it wished. Its companies need approval from the National Development and Reform Commission to issue offshore bonds.

It’s unrealistic to expect such altruism, though. So, be afraid for Asia’s junk bond market. — Bloomberg