CHINESE developers' bonds avoided last week's stock market plunge as investors said the government's curbs on speculative property purchases will discourage companies from excessive investment.
Dollar-denominated notes sold this year by Chinese and Hong Kong builders slipped 0.2 percent from March 1 when the measures were announced, while the builders' shares slumped 7.8 percent, according to data compiled by Bloomberg News last Friday. Globally, corporate dollar securities fell 0.5 percent in the period, according to Bank of America Merrill Lynch indexes.
"These bonds have been pretty resilient," said Swee Ching Lim, Singapore-based credit analyst at Western Asset Management Co. "From a credit perspective, there could be a silver lining in the re-emphasis of cooling measures in that this may help to tone down potential aggressive landbanking activities."
Up to last Friday, Chinese mainland and Hong Kong builders sold US$11.1 billion in the US currency in 2013, the most for any similar period in previous years, boosting cash holdings that may either be invested on expansion or set aside to repay debt. The top 10 biggest listed developers and their units have an equivalent of about US$8.7 billion of debt due by the end of next year, compared with US$365 billion of assets as of last Thursday, according to data compiled by Bloomberg News.
China Vanke Co, the nation's largest developer by market value, hired banks for a planned dollar bond sale, an insider said three days after the measures were announced.
Previous restrictions
The builder sold US$800 million of five-year notes, its debut offering in the US currency, at 195 basis points more than similar maturity Treasuries, according to data compiled by Bloomberg News. That's below the 221 basis point spread on similarly rated dollar debt of Asian companies, according to HSBC Holdings Plc indexes.
Vanke's full-year profit rose 30 percent last year as it sold more small and medium-sized residences, which were less affected by previous property restrictions, it said on February 27. The builder increased home sales 16 percent in 2012 to 141.2 billion yuan (US$22.7 billion), an industry record, it said. Even so, its share price had fallen 6.6 percent by last Friday since the newest curbs were announced.
Along with the higher down payments and borrowing costs for second-home mortgages in cities with "excessively fast" price gains, authorities ordered stricter enforcement of taxes on sales as they step up a three-year campaign to cool the housing market.
The central bank's regional branches may implement the measures in accordance with the price-control targets of local governments, the State Council said. Individuals selling properties should pay a 20 percent tax on profits from sales when the original purchase price is available.
Many sellers now say they can't provide the data and instead pay a tax of 1 percent of the total sale value, according to Centaline Property Agency Ltd, China's biggest real estate brokerage.
While the new rules delivered "an important message that price exuberance will not be tolerated," the steps are mainly a "fine-tuning approach as expected," HSBC Holdings Plc analysts led by Derek Kwong said. The lender has forecast that house prices will advance 10 percent in the largest Chinese cities, and the latest curbs "will not challenge" those assumptions.
New home prices in 53 of 70 major Chinese cities registered year-on-year increases in January, according to the National Bureau of Statistics.
High-end projects
"With limited impact to the secondary market, I think there will still be supply from this sector coming to the market," said Angus Hui, a fixed-income fund manager at Schroder Investment Management Ltd in Hong Kong. "In terms of pricing, however, investors could demand higher new issue discounts."
Developers with a large proportion of high-end projects, which appeal to speculative buyers, will be hurt most by the government's measures, according to a Moody's Investors Service report.
Yanlord Land Group Ltd, Greentown China Holdings Ltd, Glorious Property Holdings Ltd, SPG Land Holdings Ltd and SRE Group Ltd are "more exposed" to the new rules compared with other rated developers, Moody's said.
Market signals indicate a negative effect on equity prices rather than bonds. While Glorious Property's US$250 million security was trading up at 101.18 last Friday after being priced at par on February 25, its shares have dropped 4.83 percent in that period, according to Bloomberg-compiled data. The price of Greentown's 2018 notes were little changed from March 1, while its stock had slid 6.5 percent, according to the data.
Yanlord's bonds due in the same year were also essentially unchanged, compared with the 2.6 percent retreat in its shares.
In the longer term, the measures may "reduce the risk of large price hikes and contribute to a healthy development of China's property market," Moody's said in maintaining its stable outlook for the sector despite the latest developments.
Dollar bonds sold by Chinese companies have returned more than 7 percent for five consecutive quarters to the end of 2012 as money has flowed back into emerging markets, according to HSBC indexes. The securities lost 16 percent in the third quarter of 2011, after Carson Block's research firm Muddy Waters said Sino-Forest Corp. overstated profit margins in June of that year and Moody's warned of "red flags" on the accounting of 61 Chinese firms the next month.
The nation is targeting economic growth of 7.5 percent this year, the same as 2012, Chinese Premier Wen Jiabao said last week. Gross domestic product expanded 7.9 percent in the three months through December, up from 7.4 percent in the previous period.
The pickup has pushed up sovereign bond yields and buoyed the nation's currency. The benchmark 10-year government note yield climbed to a high for the year at 3.61 percent on January 29 from as low as 3.24 percent on July 11.
Good fundamentals
The yuan touched a 19-year high at 6.2124 on January 14, and has advanced 0.5 percent in the past month, prices from the China Foreign Exchange Trade System show.
The cost of insuring China's debt against non-payment with credit-default swap contracts has fallen 3 basis points to 61.3 this month, according to data provider CMA. It is down from as high as 145.9 in June last year. The indexes typically fall as investor confidence improves and rise as it deteriorates.
Hong Kong-based Swire Properties Ltd, the majority owner of the retail project in Beijing's Sanlitun Village, sold US$500 million of seven-year notes at 165 basis points more than Treasuries on March 4. That compares with the 280 basis point spread on its US$500 million 10-year note sold in June 2012.
"The fundamentals still look good for Chinese property companies and their financial flexibility is better than ever," Todd Schubert, head of fixed income research at Bank of Singapore, said on March 5. "I don't think it's a significant shift in government policy, they're just trying to wring out speculative excess in the market."
