Chinese bond sell-off spreads to high-grade Tencent and banks

China’s higher-quality dollar bonds are suffering their worst sell-off in about seven months as property woes spill into the broader credit market. 

Spreads on the investment-grade notes — which account for the bulk of offshore dollar securities from Chinese issuers — widened about 8 to 10 basis points Tuesday, traders said. That would be the biggest daily expansion since April after a widening of 7 basis points Monday, according to a Bloomberg index. 

The selloff has moved well beyond China’s higher-quality property names. Tencent Holdings’ dollar bond spreads widened 12 basis point to 137 basis points Tuesday, set for the biggest jump since July. Financial issuers are also slumping, with the yield premium on a Bank of Communication Hong Kong note widening about 10 basis points.

Signs are spreading of contagion from debt crises in China’s property sector, which has been grappling with a clampdown on excessive leverage and liquidity woes at real estate giant China Evergrande Group. The fallout had until recent days been largely contained to junk-rated developers. But investors have since grown increasingly concerned about the impact on larger property firms and the broader economy. 

“We believe some form of government policy easing or intervention is ultimately inevitable, at which time Chinese dollar bonds should rebound strongly,” said Mark Reade, head of fixed-income desk research at Mizuho Securities Asia.
 

Property stress spurs Fed warning 

Just weeks ago, Wall Street analysts and central bankers were quick to assure investors that a collapse by China Evergrande Group wouldn’t be a Lehman moment. Regulators in Beijing said that the crisis would be “contained.” Now that a bond selloff has spread to China’s entire real estate sector and beyond, concern is growing about the potential risk to the global financial system. The US Federal Reserve made that link explicit in a report, warning that what happens in China’s property industry could impact financial markets and threaten world economic growth.