Surprising institutional interest in Chinese high-yield bonds

Goldman Sachs Asset Management buys one of the world’s most troubled assets – Chinese real estate debt – even when other investors fear. The company adds a “modest amount of risk” through high-yield bonds issued by Chinese developers denominated in US dollars.

The bonds have sold sharply over the past two months as China Evergrande Group, the world’s most indebted construction company, approaches a potential default that could have a domino effect in the rest of the real estate sector.

However, according to institutional investors, the market overestimates the risk of this danger. And that creates opportunities. “Ultimately, the real estate sector has been a major driver of Chinese growth over the past two decades,” said Angus Bell of the Goldman Sachs portfolio management team. “It is unlikely that the government will allow such a detrimental effect on the growth that would occur if it allowed such a large number of construction companies to go bankrupt.

The Bloomberg index of junk-rated Chinese dollar bonds fell 22 percent since early September as yields rose as the government affected the real estate sector and the debt crisis in Evergrande deepened. Senior government officials stressed that the risks in the real estate market are controlled and the restrictions on housing loans in some of the largest banks are being relaxed.

Goldman also added Chinese government bonds in local currency to its investment in what Bell defines as a risk-off trade, based on PBOC’s willingness to provide liquidity to local markets as the economy slows.

The central bank could reduce its banks’ reserve ratio by another 50 basis points in the coming months as the need to ease monetary policy increases.

Charts: with permission of Bloomberg Financials L.P.

 Junior Trader Nikolay Stoychev


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