Downtrend: Home prices declined in 35 of China’s 70 cities last month from April, the most since May 2012. In Shanghai, prices decreased 0.3 per cent, the first drop in two years, while they fell 0.2 per cent in Shenzhen. — PHOTO: BLOOMBERG

[HONG KONG] JPMorgan Asset Management and Invesco Asset Management say China’s cooling property market is an opportunity to boost dollar bond holdings as the government’s targeted stimulus benefits the largest developers.

Chinese real-estate companies accounted for six of the 10 best-performing Asian notes in the past three months, according to a Bank of America Merrill Lynch index. The yield on 2018 debt of China Overseas Land & Investments Ltd, the nation’s largest developer by market value, dropped to 3.35 per cent last week, from a record 4.31 per cent on Feb 5, while that on similar-maturity bonds of China Vanke Co fell to 3.95 per cent, from an all-time high of 5.07 per cent on March 20.

We will pick the winners from these trends, said Stephen Chang, head of Asian fixed income at JPMorgan Asset, which oversees US$39 billion in emerging-market debt. Although sales and prices are falling along with margins, we have identified the larger developers are gaining market share and executing well.

Premier Li Keqiang has pledged to safeguard this year’s growth target of 7.5 per cent, fuelling bets the government will encourage increased lending to selected projects and relax restrictions in the real-estate market. Larger developers may benefit from industry consolidation as smaller builders face a funding squeeze with a record amount of property trusts maturing next year and prices falling in the most cities in two years.

Home prices declined in 35 of China’s 70 cities last month from April, the most since May 2012, official data showed on June 18. In the financial centre of Shanghai, prices decreased 0.3 per cent, the first drop in two years, while they fell 0.2 per cent in the southern business hub of Shenzhen.

Softening prices are good because they imply there isn’t a bubble any more, said Ken Hu, Hong Kong-based chief investment officer of fixed income for Asia Pacific at Invesco, which manages US$787 billion globally. We pick developers with high turnover and those who tend to build smaller-sized flats. Profit margin isn’t that key to bondholders like us. Our approach is to buy on dips.

Developers including Vanke that cut prices by 10 per cent to 15 per cent achieved good sales volume, Deutsche Bank AG analysts led by Hong Kong-based Tony Tsang wrote in a June 13 report.

Vanke, headquartered in Shenzhen, recorded a 16.2 per cent increase in sales value in the first five months of 2014 from a year earlier, it said in a June 3 statement to the Shenzhen stock exchange.

Larger industry players are able to tap overseas capital markets for funds. Sales of dollar bonds by Chinese companies totalled US$91 billion in 2014, compared with US$89 billion in the previous year, according to data compiled by Bloomberg.

Smaller builders, which rely on property trusts for financing, have to repay 203.5 billion yuan (S$40.8 billion) in 2015, according to research firm Use Trust.

That’s almost double the 109 billion yuan due this year. China’s banking regulator said on June 6 it will monitor developer finances, a sign of concern defaults may spread after the March collapse of Zhejiang Xingrun Real Estate Co, a builder south of Shanghai.

China South City Holdings Ltd, which runs logistics parks for industrial materials, sold one billion yuan of five-year bonds at a coupon of 7.5 per cent in the interbank market on May 9. It plans to use the proceeds to repay short-term bank loans.

Greenland Holding Group has hired banks to arrange investor meetings from yesterday for a potential dollar bond offering, according to a person familiar with the matter.

Vanke’s bond borrowing costs dropped to 3.45 per cent on a weighted average last week, compared with 5.5 per cent in the first quarter of 2011, according to data compiled by Bloomberg. It also managed to extend the average maturity of its notes to 3.95 years, from 2.43 years in 2011.

Slowing growth is causing declines in the yuan and onshore interest rates. The Chinese currency has fallen 2.8 per cent against the dollar this year, the worst performance in Asia.

The yield on the benchmark 10-year government bond has dropped 52 basis points to 4.04 per cent in the same period as investors sought safe havens.

Gross domestic product (GDP) will probably expand 7.3 per cent this year, the slowest pace since 1990, according to a Bloomberg survey.

The downturn in the property market will be more prolonged this time than in previous corrections, Tom Byrne, senior vice-president at Moody’s, said at a June 19 conference in Shanghai.

Broad price cuts are likely to come in late August or in September when more new projects are set to be introduced, UBS AG Hong Kong-based analyst Eva Lee wrote in a report last week. Moody’s revised its credit outlook for Chinese developers to negative from stable on May 21.

The Shanghai Stock Exchange Property Index, which tracks 24 real-estate companies listed in the city, has slumped 6.3 per cent this year, exceeding the 4.2 per cent decline for the benchmark Shanghai Composite Index.

Overall, the housing market is cooling in some parts, like in third or fourth-tier cities, said Mr Chang at JPMorgan Asset. But we do see a silver lining. There’s actually a healthy pick-up in transactions at specific locations after some discounting.

The nation has introduced measures to help the real-estate industry, which JPMorgan Chase & Co says poses the biggest near-term risk to growth in the world’s second-largest economy. The People’s Bank of China (PBOC) told 15 banks in May to improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers. The south-eastern city of Fuzhou has removed home-purchase limits for buyers who make one-time payments, the Securities Times reported on June 18, citing sales people from two developers.

The government may announce additional minor stimulus measures after Premier Li said in London last week that the nation will maintain a minimum growth rate of 7.5 per cent, according to a China Securities Journal commentary on June 20.

The PBOC may release more targeted steps to prevent expansion from falling short of the goal, it added.

A preliminary Purchasing Managers’ Index for manufacturing was 50.8 for June, HSBC Holdings plc and Markit Economics data showed yesterday.

That compared with a final reading of 49.4 in May and the median estimate of 49.7 in a Bloomberg survey of economists. It’s the first time this year that the figure exceeded 50, signalling expansion.

Policymakers are actually putting out more measures to support this sector, said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments, which oversees about US$71 billion. I think, volume-wise, it could catch up a little bit in the second half, especially those who are not aggressively buying land. There is still a wide selection, even within this sector. — Bloomberg