After incurring significant losses in China’s corporate bond market, bond fund managers with strategies centred on Asian high-yield issuers have shifted to cash and other non-China assets.After incurring significant losses in China’s corporate bond market, bond fund managers with strategies centred on Asian high-yield issuers have shifted to cash and other non-China assets
On July 20, 2022, CCTV cameras were spotted close to residential construction sites in Shanghai, China. Aly Son/ Reuters.
China’s real estate market experienced a record number of defaults in 2022 among leading private developers and even some state-owned firms, despite once being a sought-after investment that accounts for more than half of Asia’s high-yield corporate bond issuance.
Capital exodus brought on by rash Federal Reserve interest rate increases dealt a further damage to the already frail sector.In her more than 20-year investment career, Monica Hsiao, founder and chief investment officer of Triada Capital, an Asia-focused credit long-short fund, claims she has never faced a situation like this one.
China’s real estate market experienced a record number of defaults in 2022 among leading private developers and even some state-owned firms.
Once a sought-after investment that accounts for more than half of Asia’s high-yield corporate bond issuance.Capital exodus brought on by rash Federal Reserve interest rate increases dealt a further damage to the already frail sector.
In her more than 20-year investment career, Monica Hsiao, founder and chief investment officer of Triada Capital, an Asia-focused credit long-short fund, claims she has never faced a situation like this one.We currently possess more cash than ever before, according to Hsiao, who established the fund in Hong Kong in 2015.
Prior to founding Triada, Hsiao managed Asia credit for London-based credit-focused asset manager CQS, but she withheld information about the fund’s size and performance.
More than 20 Chinese real estate developers with Moody’s ratings have defaulted since the start of 2021, which has increased the proportion of Asian high-yield enterprises with junk ratings to a historic high.The price of China high yield bonds has been below 20 cents on the dollar for many of their owners.
The market price of the defaulted Sunac China (1918.HK) bonds, which are due in 2025, is 6 cents to a dollar.
According to Morningstar data, the top 10 Asia high yield bonds have experienced an average return decline of more than 30% this year, with Fidelity Funds’ Asian High Yield Fund and UBS’s SICAV – Asian High Yield (USD) experiencing losses of more than 40% as of October 27.
Since, stringent restrictions on developer borrowing were put in place by officials in the middle of 2020.
The real estate market, which is essential to China’s political and economic stability, has suffered a significant decrease in prices and sales.
Investors expected legislative initiatives to support real estate demand this year, but according to Hsiao, nothing like that happened.As the prospect of U.S. inflation and geopolitical threats intensified in the summer, Hsiao continued to cut her fund’s exposure to China from the first quarter.
Class of “UNINVESTABLE” Assets
According to Gordon Ip, chief investment officer for fixed income at asset management Value Partners, the fund has bought bonds from Indonesia and India this year, particularly in the energy and resources and renewables sectors, and has decreased its total exposure to Chinese real estate.
By the end of September, Value Partners’ Greater China High Yield Income Fund had lost 37% of its value.
The fund’s assets have decreased from $980 million at the end of April to $611 million today.”In terms of risk management, this year has been outstanding,” according to Ip. “It is now very difficult to manoeuvre the market because of rising rates, soaring inflation, geopolitical unrest, and high sector risk (China property)”.
Ip claimed that by making sure it never “over owns” a particular issue and that it always has a respectable amount of cash, the fund has managed to maintain its liquidity.
According to Nicholas Yap, head of Asia Flow Credit Desk Analysts at Nomura, bond investors are often holding steady and already anticipating next year.
Investors do not anticipate a quick recovery of China’s real estate debt markets due to regulatory uncertainties as well as some developers’ differential treatment of domestic and foreign investors during the restructuring process.
According to Hsiao, there is “no trustworthy restructuring mechanism in China that coordinates between onshore and offshore,” and she observes that defaulted issuers are hardly ever prepared to engage in negotiations.
Although, there are some bonds with upside potential, she claimed that the China high yield asset class is currently “uninvestable”.
We’re in the middle of the ideal storm. As she put it, “We hope for the best but plan for the worse.
