China’s property sector – the road ahead

Executive summary

In this market update, Kylie Soh, Fullerton’s Fixed Income Product Specialist, examines the recent developments in China’s property sector and what lies ahead for investors.

  • The latest statements from Chinese policymakers and news reports suggest a shift in policy tone, and we anticipate that the worst of the Chinese property sector tightening is probably behind us.
  • Looking ahead, we expect a further fine-tuning in housing policies to stabilise sentiments, but a broad easing of policy measures appears unlikely at this stage. The government remains committed to further deleveraging of the property sector.
  • We do not rule out the possibility of more defaults ahead, but we hold the conviction that the short- term pains will lead to long term gains. As struggling players are squeezed out, sector consolidation should take place, leaving the better quality, lower-leveraged property developers, which is medium-term positive for bond investors.
  • We have been reducing our exposure to the Chinese property sector, particularly high yield developers we identified as being the most vulnerable in the challenging financial conditions, as part of our risk management efforts. We expect market volatility to persist and managing tail risks will be crucial.