Hong Kong: JPMorgan Asset Management and Invesco Asset Management say China’s cooling property market is an opportunity to boost dollar bond holdings as the government’s targeted stimulus benefits the largest developers.

Chinese real-estate companies accounted for six of the 10 best-performing Asian notes in the past three months, according to a Bank of America Merrill Lynch index. The yield on 2018 debt of China Overseas Land and Investments Ltd, the nation’s largest developer by market value, dropped to 3.35% last week, from a record 4.31% on 5 February while that on similar-maturity bonds of China Vanke Co. fell to 3.95%, from an all-time high of 5.07% on 20 March.

“We will pick the winners from these trends," said Stephen Chang, head of Asian fixed income at JPMorgan Asset, which oversees $39 billion (about 2.35 trillion) in emerging-market debt. “Although sales and prices are falling along with margins, we have identified the larger developers are gaining market share and executing well."

China’s Premier Li Keqiang has pledged to safeguard this year’s growth target of 7.5%, fuelling bets the government will encourage increased lending to selected projects and relax restrictions in the real-estate market.

Larger developers may benefit from industry consolidation as smaller builders face a funding squeeze with a record amount of property trusts maturing next year and prices falling in the most cities in two years.

Softening prices

Home prices declined in 35 of China’s 70 cities last month from April, the most since May 2012, official data showed on 18 June. In the financial centre of Shanghai, prices decreased 0.3%, the first drop in two years, while they fell 0.2% in the southern business hub of Shenzhen.

“Softening prices are good because they imply there isn’t a bubble anymore," said Ken Hu, Hong Kong-based chief investment officer of fixed income for Asia Pacific at Invesco, which manages $787 billion globally. “We pick developers with high turnover and those who tend to build smaller-sized flats. Profit margin isn’t that key to bondholders like us. Our approach is to buy on dips."

Developers including Vanke that cut prices by 10% to 15% achieved good sales volume, Deutsche Bank AG analysts led by Hong Kong-based Tony Tsang wrote in a 13 June report. Vanke, headquartered in Shenzhen, recorded a 16.2% increase in sales value in the first five months of 2014 from a year earlier, it said in a 3 June statement to the Shenzhen stock exchange.

Taking advantage

Larger industry players are able to tap overseas capital markets for funds. Sales of dollar bonds by Chinese companies totalled $91 billion in 2014, compared with $89 billion in the previous year, according to data compiled by Bloomberg.

Smaller builders, which rely on property trusts for financing, have to repay 203.5 billion yuan ($32.7 billion) in 2015, according to research firm Use Trust. That’s almost double the 109 billion yuan due this year.

China’s banking regulator said on 6 June that it will monitor developer finances, a sign of concern defaults may spread after the March collapse of Zhejiang Xingrun Real Estate Co., a builder south of Shanghai.

“It won’t be surprising to have a few defaults in the sector in an economic slowdown, given you have thousands of developers and many of them are small ones," BOCI’s Wang said. “The bigger ones, especially those listed, can take advantage to lower their funding costs as the industry consolidates."

China South City Holdings Ltd, which runs logistics parks for industrial materials, sold 1 billion yuan of five-year bonds at a coupon of 7.5% in the interbank market on 9 May. It plans to use the proceeds to repay short-term bank loans. Greenland Holding Group has hired banks to arrange investor meetings from today for a potential dollar bond offering, according to a person familiar with the matter.

Borrowing costs

Vanke’s bond borrowing costs dropped to 3.45% on a weighted average last week, compared with 5.5% in the first quarter of 2011, according to data compiled by Bloomberg. It also managed to extend the average maturity of its notes to 3.95 years, from 2.43 years in 2011.

Slowing growth is causing declines in the yuan and onshore interest rates. The Chinese currency has fallen 2.8% against the dollar this year, the worst performance in Asia. The yield on the benchmark 10-year government bond has dropped 52 basis points (one basis point is 0.01 percentage point) to 4.04% in the same period as investors sought safe havens. Gross domestic product will probably expand 7.3% this year, the slowest pace since 1990, according to a Bloomberg survey.

Prolonged downturn

The downturn in the property market will be more prolonged this time than in previous corrections, Tom Byrne, senior vice-president at Moody’s Corp., said at a 19 June conference in Shanghai. Broad price cuts are likely to come in late August or in September when more new projects are set to be introduced, UBS AG Hong Kong-based analyst Eva Lee wrote in a report last week.

Moody’s revised its credit outlook for Chinese developers to negative from stable on 21 May. The Shanghai Stock Exchange Property Index, which tracks 24 real-estate companies listed in the city, has slumped 6.3% this year, exceeding the 4.2% decline for the benchmark Shanghai Composite Index.

“Overall, the housing market is cooling in some parts, like in third- or fourth-tier cities," said Chang at JPMorgan Asset. “But we do see a silver lining. There’s actually a healthy pickup in transactions at specific locations after some discounting."

‘Minor stimulus’

The nation has introduced measures to help the real-estate industry, which JPMorgan Chase & Co. says poses the biggest near-term risk to growth in the world’s second-largest economy. The People’s Bank of China (PBOC) told 15 banks in May to improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers. The southeastern city of Fuzhou has removed home-purchase limits for buyers who make one-time payments, the Securities Times newspaper reported on 18 June, citing sales people from two developers.

The government may announce additional “minor stimulus measures" after Premier Li said in London last week that the nation will maintain a minimum growth rate of 7.5%, according to a China Securities Journal commentary on 20 June. The PBOC may release more targeted steps to prevent expansion from falling short of the goal, it added.

A preliminary Purchasing Managers’ Index for manufacturing was 50.8 for June, HSBC Holdings Plc and Markit Economics Ltd data showed today. That compared with a final reading of 49.4 in May and the median estimate of 49.7 in a Bloomberg survey of economists. It’s the first time this year that the figure exceeded 50, signaling expansion.

“Policy makers are actually putting out more measures to support this sector," said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments, which oversees about $71 billion. “I think, volume-wise, it could catch up a little bit in the second half, especially those who are not aggressively buying land. There is still a wide selection, even within this sector." Bloomberg