China’s Credit Market Stress Eases After Onshore Defaults Drop

Strains in China’s credit market have lessened after local defaults fell to the lowest this year. Conditions also improved after declines in home sales eased slightly amid a broader property debt crisis.

Onshore stress eased in September to its lowest point since November 2022, dropping to level 2 from 3 in Bloomberg’s China Credit Tracker. The gauge indicates rising levels of financial strain via a band from 1 to 6. Helping the measure was just one bond payment being missed last month, involving a 200 million yuan ($27 million) note from Wuhan Dangdai Science & Technology Industries (Group) Co., according to data compiled by Bloomberg.

Fresh debt troubles at builders China Evergrande Group, Country Garden Holdings Co. and Sino-Ocean Group Holding Ltd. left overseas securities from those issuers at deeply distressed levels.

Even so, offshore stress fell to level 3 from 4, the credit tracker shows. China’s junk dollar note market returned 0.5% in September, just the third monthly advance this year according to a Bloomberg index, as units of major component China Huarong Asset Management Co. rallied on bond buybacks.

High yield’s September performance may illustrate some investors’ pain tolerance with an ongoing property-sector cash crunch that’s resulted in record offshore defaults. The median price for high-yield Chinese builders’ dollar bonds was recently 7 cents, an all-time low, as large institutions continue to cut sector exposure, according to Bloomberg Intelligence.

“The market focus now is whether there is any recovery in sales and how sustainable it can be,” said Zhi Wei Feng, senior analyst at Loomis Sayles Investments Asia Pte. China’s largest builders logged a smaller year-over-year drop in new-home sales last month after fresh support measures were unveiled.

Evergrande, the firm at the heart of the country’s property-debt crisis, in late September scrapped votes on its plan to restructure offshore borrowings and said its chairman was suspected of committing crimes. Sino-Ocean suspended offshore payments last month and Country Garden this week offered the strongest indication yet it’s set for a maiden default and debt restructuring. Prior rounds of concerns involving the three firms had rocked China’s credit market.

But junk dollar notes have been historically quiet of late, following several years of big daily moves and despite recent losses for bonds globally. Ten-day volatility for the Bloomberg China high-yield gauge reached its lowest level since May 2021 on Sept. 20, and it has remained muted since. Though junk bonds have posted losses the past three weeks, the declines have been smaller than those recorded world-wide.

“Market sentiment could also be affected by how restructuring plans eventually unfold and the degree of value that is preserved for bondholders,” said Chang Wei Liang, a macro strategist at DBS Bank Ltd. “A smooth restructuring should give investors relief and slightly support market sentiment.”

Sunac China Holdings Ltd. last week received court approval of its offshore-debt plan that creditors backed nearly unanimously. The developer’s restructuring proposal was unveiled in March and within weeks had support from those holding more than 75% of claims.