As signs from China’s Central Bank to further stabilize the economy, the interest rate for the medium-term lending facility (MLF) operation has been lowered by 10 basis point (bps) last week, the first time since April 2020 and about a month after it cut the reserve requirement ratio (RRR) in December.
Furthermore, the one-year and five-year Chinese loan market quoted rate (LPR) have also been lowered last week:
· year LPR downs 10 bps to 3.7 percent
· 5-year LPR (the benchmark for mortgage interest rates) fall 5 bps to 4.6 percent (before that has been inactive for the past 21 months).
The intensified counter-cyclical regulation of monetary policy reflects the pre-emptive direction of macro policies. Furthermore, we also see China formulating more measures to stabilize the real estate sector.
According to news reports, under guidance of the Financial Stability and Development Committee of the State Council, the sector’s main regulator, the Ministry of Housing and Urban-Rural Development and other authorities are drafting the new rules to potentially relax developers' use of funds in pre-sale escrow accounts to assist in timely project delivery, payments to suppliers, and outstanding financings.
These measures aim to ease liquidity stress and prevent the financial contagion in the real estate industry. The new regulations are expected to be launched as soon as the end of January, and the news has stimulated a sharp increase of 10-20 percent in high-quality developers bonds last week.
We believe this new round of relaxation will bring some breathing space for developers and the market is expects more favorable policies might be introduced in the next few months. In conjunction with the lowering of mortgage loan interest rates, it is expected that industry outlook may bottom out and China property credits may continue to improve in performance this year and position for a rebound.
Overall, we believe there are increasing positive signals for China high yield investors. The new policies introduced by the authorities recently signals potential further relaxation in the near future, which has further boosted the investment sentiment of the market.
For the past 6 months, Value Partners has been moving up the quality spectrum of China high yield bonds. In the view of recent market turbulence in China’s property sector, we have particularly focused on selected companies with relatively manageable debt level in the market and companies which proactively obey the Three Red Line. We believe real estate developers with stable capital and cash flow will most likely benefit in any future market rebound.
Lastly, although volatility is expected to remain elevated, we believe the current dislocation will provide opportunities in the medium to long-term but will require investors’ patience.
