China’s $740 Billion Offshore Credit Market Rally Stalls Just as Restructuring Heats Up

Distressed Chinese developers are finally moving forward with restructuring plans, but that’s failed to help sustain a rebound in dollar bonds from the country’s issuers.

Bloomberg’s China Credit Tracker shows stress in such notes rose to 4 in February from 2 in January, which had marked the lowest reading since data compilation began in 2021. The slide toward more stress came as Chinese dollar bonds lost 1.6% last month alongside a global pullback on fresh US interest-rate worries. This month has brought volatility from the failure of several American banks.

Things have been better onshore. There, stress eased to 3 in February from 4, as yuan notes continued to recover from a rout in late 2022.

The focus for global and Chinese investors is now turning to a busy schedule for restructuring talks. Sunac China Holdings Ltd. is preparing a restructuring support agreement for some major offshore creditors to sign. Smaller peer Zhenro Properties Group Ltd. expects to make a preliminary offer available this month. Logan Group Co. has started sharing proposals with offshore creditors and CIFI Holdings Group Co. unveiled key benchmarks as the builder works out its plans.

They follow China Fortune Land Development Co.’s recent $5.1 billion issuance of new dollar bonds as part of its debt restructuring. The firm two years ago became the first developer to default in the wake of the government’s real estate leverage clampdown.

A stable property market is a top priority for officials after a nationwide debt crackdown fueled a cash crunch and record defaults, prompting more than a year of falling home sales. Former Premier Li Keqiang said at the just-concluded National People’s Congress that efforts should be made to prevent “unregulated” expansion in order to promote stable development for the real estate industry.

Builders’ views on debt restructurings are “subject to the housing market’s recovery,” said Xuchen Zhang, an emerging markets credit analyst with Jupiter Asset Management Ltd. “If the housing market is considered having potential to recover, issuers will be more willing to push restructuring since it may help them open refinancing channels and ride the sector upcycle in the future.”

New-home sales for China’s biggest developers rose year-over-year last month for the first time since June 2021, according to an industry data provider, a signal that policy makers’ support measures are starting to bear fruit. Prices didn’t fall in January for the first month in 17, government data show. February figures are due to be released Thursday.

While some builders have shown a greater degree of debt-restructuring progress, the lack of more specifics from others highlights the often long and unpredictable process.

Take China Evergrande Group, whose effort is one of the nation’s largest ever. The firm has yet to reach an agreement with major creditors on a framework 15 months after first defaulting on dollar debt. That’s despite it having said it wanted to win bondholder support by early March, ahead of a March 20 court hearing on a petition to wind up the firm.

Meanwhile, local officials have been working to bolster sentiment for onshore bonds issued by government-linked borrowers amid some concern about debt risks in that portion of China’s credit market.

A senior financial official from Gansu, one of the country’s poorest provinces, made a rare public plea in February for investors to buy notes issued by state-owned firms there. Authorities from a town in coastal Shandong province recently met with bond investors and vowed the local government would ensure the safety of investor funds.