China’s Surviving Borrowers Enjoy Lowest Stress Since Crisis

China’s $680 billion offshore credit market has entered its least troubled period since a property crisis spread two years ago, even if only for the dwindling group of surviving borrowers that haven’t yet defaulted.

The market’s stress level fell to level 1 last month from 3 in October, according to Bloomberg’s China Credit Tracker, marking its lowest since data compilation started in May 2021. The gauge indicates rising degrees of financial strain via a band from 1 to 6.

The index remained at level 2 for the country’s local corporate bond market.

The rare burst of calm among global investors offers an early sign of relief after Beijing escalated a campaign to prevent a prolonged housing slump and an industry-wide liquidity squeeze from undermining financial stability. The drumbeat of policy support quickened last month, from providing financing to a potential list of 50 developers to an unprecedented proposal to allow banks to offer unsecured loans to qualified builders.

However, with major defaulters from China Evergrande Group to Country Garden Holdings Co. still heaping distress on creditors and generating uncertainties about debt restructuring, how long the tranquility can last remains a question.

Authorities’ recent rescue steps “indicate the government’s efforts to limit the downside,” said Anna Zhang, a credit analyst at T Rowe Price Hong Kong Ltd. “If any follow-up support is announced, those developers who haven’t defaulted should have a higher chance of surviving.”

The plunge in stress offshore came as China’s junk dollar bonds, dominated by the nation’s cash-strapped builders, rallied for three straight months, shows a Bloomberg index that excludes defaulted debt. That’s the best performance since January.

Dollar notes of survivors from Agile Group Holdings Ltd. to Seazen Holdings Co. and Ping An Real Estate Co., were among the best performers last month, with Agile leading the gains with total returns exceeding 77%.

A Bloomberg Intelligence gauge of Chinese property shares also rallied 6% in November, ending a three-month slide.

In addition to the moves aimed at improving funding conditions, authorities also gave a rare show of support for China Vanke Co., the country’s second-largest builder by sales, to ease concerns about payment risks that had led to a selloff in its dollar bonds.

However, the housing sector’s road to recovery remains bumpy, as payment setbacks and uncertainties about debt workouts linger on.

Just last month, Shanghai-based Powerlong Real Estate Holdings Ltd. defaulted on one of its dollar bonds due to sluggish sales and worsening liquidity. Meantime, Evergrande, the country’s most indebted developer, continues its struggle with delivering a restructuring plan that can save itself from potential court-ordered liquidation.

“For confidence in the sector to return, it will take not just an improvement in the funding conditions but also a meaningful rebound in contracted sales and this has remained weak,” said Thu Ha Chow, head of Asia fixed income at Robeco Group. “For the market to have a meaningful recovery it will require the economy to strengthen which will in turn give both consumers and investors greater confidence.”