Dalian Wanda Commercial Management issued a two-year US$400 million bond in January that is the first publicly sold US dollar bond by a Chinese property company since late 2021.

The transaction, which had an 11% coupon and was priced with a yield of 12.375%, is a breakthrough for China’s high-yield bond market.

China’s offshore high-yield corporate bond issuance volume shrank 90% in 2022, from US$32.9 billion in 2021 (99 issuances) to US$3 billion in 2022 (10 issuances), according to latest data from Refinitiv.

China’s reopening and a series of policy relaxations involving the property sector have added fuel to the high-yield bond issuance space, which is dominated by developers. With the policy shift, the market in December 2022 viewed only 25% of developers as negative, a decline from 47% in September 2022, according to Natixis China Bond Monitor (NCBM).

However, advisers do not expect a surge in US dollar bond issuance from China’s property developers, especially those highly exposed to residential real estate.

And there is wide credit polarization within the property sector. High-quality developers, especially state-owned ones, are attracting more interest from investors. And highly rated companies with strong balance sheets could consider issuing in US dollars. For example, an investor like Manulife Investment Management is considering increasing its offshore China US dollar high-yield exposure due to its attractive valuation and preference for stated-owned developers that can benefit from state support.

However, funding costs for private firms have surged to the highest levels in years, NCBM notes. And, even though Dalian Wanda reopened China’s high-yield market, residential developers may have to pay yields higher than its 12.375% to attract investor support.

China’s bond market has seen a gradual recovery. The onshore bond default ratio fell, but the proportion of bonds with repayment pressure grew from 0.56% in 2021 to 0.64% in 2022, demonstrating that more issuers are staying alive through debt extension.

As well, the offshore bonds default ratio doubled to around 3% in 2022, and the ratio of bonds with repayment pressure is nearly 5%. The onshore bond default ratio is only 0.1%, and nearly 150 billion yuan (US$22.35 billion) of onshore bonds will be paid during grace periods or extensions.

In addition, private-owned enterprises (POEs) are facing the highest repayment pressure, given that around 8% of onshore bonds and 10% of offshore bonds issued by Chinese POEs faced repayment pressure in 2022, according to data from NCBM.

Chinese issuers are facing more refinancing pressure in 2023. Chinese property developers have over US$292 billion of onshore and offshore debts due through to the end of 2023, Bloomberg Intelligence data show.

“Asia high-yield credit remains vulnerable,” says Peng Fong Ng, head of credit for Asia at Schroders. “A focus on liquidity and cashflow positions will be key. This calls for a selective approach, especially for China property.”

The Chinese government has adopted measures to support bond issuance, which further helps ease refinancing pressure and provides more liquidity to the private sector.

The People’s Bank of China has made available to financial institutions a refinancing fund worth up to 250 billion yuan (US$37.08 billion) with the aim of supporting POEs through credit enhancement and direct bond purchases. In addition, the China Banking and Insurance Regulatory Commission encourages credit enhancement agencies to help cash-strapped firms issue bonds by providing more flexibility for payment extensions and exchange offers.

Going forward, Schroders has a positive outlook on Chinese onshore bonds in 2023, especially if the US dollar’s strength reverses. In terms of interest rates, the Chinese government bond yields will likely be trading in a narrow range and stable due to muted inflationary pressures and a modest pace of economic recovery.