China Property Bonds May Feel Tremors From Italy Vote

(Bloomberg Gadfly) -- The no vote in Italy's referendum may stir an uncomfortable sense of deja vu for investors in China's property developers -- especially holders of their dollar bonds.

While some analysts are drawing parallels to Greece's vote on Europe's bailout in 2015, a closer comparison for Asia may be 2011, when the country's then-prime minister George Papandreou sent markets reeling by floating the idea of a popular vote on austerity measures.

For Chinese real estate companies, it's the repeat of a perfect storm. As in 2011, Europe's latest bout of turmoil coincides with a period when Beijing has been imposing curbs on property sales to cool prices.  The earlier round of tightening measures, starting in 2009, squeezed the ability of developers to raise money onshore and forced them into the international bond market. By 2010, a core group of four -- Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co. and Glorious Property Holdings Ltd. -- had raised a total of $5.6 billion in dollar debt.

All those four subsequently ran into difficulties:

• Kaisa defaulted on its debt;
• Glorious Property paid a bond coupon this year after the contractual date (though within the grace period);
• Renhe breached covenants on its loans last year, a technical default that it later remedied;
• Fantasia was downgraded to B+ by S&P Global Ratings.

While the developers' problems were mostly homegrown, the travails for bondholders were compounded by a global flight from risk that had its origins in Greece. In 2011, after riots in Athens unleashed a process that culminated in the 2015 referendum, bond prices for high-yield developers from Shanghai and Shenzhen plunged.

As a result, offshore bond markets closed for Chinese high-yield issuers, the majority of which are property companies. With domestic bond and equity markets off limits and now their access to global funding avenues cut off, many analysts predicted a wave of defaults for China's developers.

That didn't happen, but this time could be different. For one thing, there are many more dollar bonds from developers outstanding. Real estate represents 27.7 percent of the $43.5 billion in securities that are included in the BofA Merrill Lynch High Yield Emerging Markets Corporate Plus China index. That index had a value of $14 billion six years ago. 

Again, China has been closing the fundraising door at home, with developers mostly barred from selling bonds or stocks onshore. Five years ago, companies found relief in shadow banking, but China is doing a better job this time around of choking that market, too.

If the kind of risk aversion that hit the sector in 2011 is repeated, there's a far bigger likelihood that the fallout will be more severe. More than 700 years after Marco Polo, China's story is again being written in Italy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Christopher Langner in Singapore at clangner@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.