Rare Government Support Seeks To Contain China Debt Risks

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by Tyler Durden
Monday, Nov 13, 2023 - 02:00 AM

By Charlie Zhu and Helen Sun, Bloomberg Markets Live reporters and strategists

1. Fresh signs of official support for debt-laden property firms emerged, triggering a relief rally in developers’ dollar bonds. China Vanke, a major developer recently rattled by repayment worries, received unusually strong support from officials in its hometown of Shenzhen last Monday.

Then came a report by local media Cailian on a meeting among the central bank, other regulators and top builders including Vanke, Longfor, and Gemdale. The first two builders’ dollar notes jumped on the news.

Market confidence in developer bonds now comes from government support - similar to those of local government financing vehicles, Ming Ming, chief economist at Citic Securities, wrote in a note. Although it takes time for the property sector to recover, vulture investors may already see value in some securities, he added.

In a contrasting example, Country Garden Holdings’ shares plunged nearly 10% Thursday after Ping An Insurance Group denied a Reuters report that authorities asked the insurer to buy the embattled developer. Ping An itself also suffered a $5.5 billion stock selloff, indicating only the state, rather than any private-sector firm, has the capacity to bail out a company of Country Garden’s size.

2. The People’s Bank of China also has debt-laden regions on its mind. Governor Pan Gongsheng pledged to provide emergency funding to heavily indebted local governments as needed, showing a sense of urgency on preventing repayment risks at regional authorities from derailing a patchy economic recovery.

In another sign that Beijing is tightening scrutiny of the issue, the Ministry of Finance listed eight cases of irregularities committed by local governments to build up hidden debt. The inclusion of financial institutions in the penalties issued by the ministry shows debt control will be a more comprehensive effort involving both creditors and debtors, Yang Yewei, analyst at Guosheng Securities, wrote in a note.

Out of some 1.3 trillion yuan ($172 billion) of refinancing bonds sold by provincial authorities over the past month or so, indebted regions including Guizhou, Yunnan, and Inner Mongolia ranked as the top issuers, according to data compiled by GF Securities.

3. Global investors turned more optimistic about Chinese assets. JPMorgan’s chief Asia & China equity strategist Wendy Liu said the bank sees increasing likelihood of a technical rebound in the country’s stock market toward the end of the year, citing improvement in risk factors from geopolitics to long-term structural growth.

Franklin Templeton Investments President Jenny Johnson said it’s time to “wade back into China” as Chinese assets are trading cheaply. Meantime, Citadel founder Ken Griffin said global investors have to “be watching and investing” in China to tap into innovation and growth in the region.

US-China relations though may still be a challenge. In a sign of how rocky the bilateral ties can be, Beijing accused Washington of discrediting China’s business environment, just when China booked more than 1 million tons of US soybeans in a gesture of goodwill ahead of this week’s summit between Xi Jinping and Joe Biden.