As Beijing looks to stabilize the battered sector, analysts at Goldman Sachs estimated that the Chinese high-yield property issuers have by one measure defaulted on nearly a quarter of their outstanding bonds this year, highlighting liquidity stress.
In a note on March 18, Kenneth Ho and Chakki Ting said that this headline figure understated stress in a sector where developers have entered into bond exchanges to avoid triggering defaults, estimating the year-to-date default rate at 5.5%. They stated:
“If we assume all the bonds from issuers that have entered into bond exchange or maturity extension transactions as being in default, the (year-to-date) default rate would rise to 23.4%.”
For 2022, the two said they maintained a default forecast for the sector of 19%, with a downside case of 31.6% and a bull case of 10.5%.
“Whilst credit stresses have picked up, China policymakers have also reiterated their accommodative policy stance,” they said, adding that “risks are clearly tilted towards the downside case.”
So far this year, of bonds in the sector that have passed their final maturity dates, 42% were fully repaid, 31% have entered into the bond exchange or maturity extension transactions, and 26% have defaulted.
They said other defaults and bond exchanges are likely, with 2.3 billion maturing in April, and more than $3 billion each in June, July, and August.
Proposing measures to facilitate a new development model for the sector, Vice Premier Liu He, China’s economic star, said on March 16 that the government needs to reduce risks in the property sector.