Chinese deleveraging to hurt small builders

China_property_developersInvestors have been advised to avoid corporate bonds issued by small property developers in China in favour of bonds from larger issuers in the sector. An analyst at NN Investment Partners made the recommendation after observing that state-owned enterprises (SOEs) in China have been told to reduce their debt levels as part of a government policy to deleverage. “In June, I travelled to Hong Kong and elsewhere in China to meet corporate issuers and visit some property projects,” said Clement Chong, senior credit analyst. “The tone seemed more cautious than a year ago; deleveraging and liquidity have become more serious corporate concerns. My meeting with a number of non-property SOEs revealed that the Chinese authorities had instructed them to deleverage with the goal of reducing gearing by 2-3 percentage points by 2020.” Small property developers are likely to be hit especially hard by the shrinking availability of lending, said Chong. “In an environment of tight funding conditions, lenders would most naturally prefer larger, investment-grade issuers or SOEs with government backing. Smaller or weaker companies, often high-yield, may become part of the collateral damage.” ©2018 funds global asia

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