China Credit Market Calm Belies Risks From Property Debt Crisis

China’s corporate-bond market has been helped recently by government efforts to support the economy, but the worsening debt travails at some of the surviving giants of the property sector are keeping risks alive.

Credit market stress levels were unchanged in October, according to Bloomberg’s China Credit Tracker, remaining at level 2 onshore and level 3 offshore. The gauge indicates rising levels of financial strain via a band from 1 to 6.

There were no missed payments on corporate yuan bonds in October, Bloomberg-compiled data show, the first instance in nearly a year. That leaves the past two months with the fewest delinquencies since 2015, after just one default in September. That all left traders feeling confident enough to push spreads on three-year bonds to their tightest levels of 2023 last week.

But any flareups from the property debt crisis could again dent sentiment. Country Garden Holdings Co. was recently declared in default for the first time on a dollar note. China Evergrande Group faces a court hearing early next month and must produce a new debt-restructuring plan to avoid an order to liquidate assets.

There have also been fresh doubts recently about some of China’s 10 largest builders by contracted sales. While dollar bonds from China Vanke Co. have rebounded in November following officials’ show of support, they lost 35% in October. Notes from Longfor Group Holdings Ltd., another investment-grade peer that’s also yet to default, have followed a similar path.

Investors want to see more concrete measures before diving back in.

Despite regulatory efforts, there has yet to be significant improvement in property demand, said Wang Chen, co-founder at The Belt&Road Origin (Beijing) Tech Co., a credit risk analysis provider.

“If sales cannot improve,” he said, “it is meaningless to talk about anything else.”

October was the fifth-straight month that new-home sales at the 100 biggest developers fell more than 25% from a year earlier, according to data from China Real Estate Information Corp.

Investors are also watching China-focused logistics firm GLP Pte, after it was recently downgraded to junk territory by S&P Global Ratings and Fitch Ratings. Both cited delays in asset monetization and deteriorated financials as the company has worked to cut debt.

Notes from Longfor, Vanke, GLP and unit GLP China Holdings Ltd. have all lost more than 20% this year, the largest declines in a Bloomberg index of Asia investment-grade dollar bonds.