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Bond yields point to huge property bubble in China

HONG KONG – THE bond market is telling Asia’s richest man Li Ka Shing that he is sitting on a Chinese property bubble that is bigger than the one deflating in the United States.

Bonds of China’s Agile Property Holdings yield 7.03 percentage points more than US Treasuries, double the premium in July and 1.65 percentage points more than the debt of Los Angeles-based KB Home, which has the same credit rating.

Agile, a housing developer in the southern province of Guangdong, and Country Garden Holdings, China’s most-profitable builder, cancelled debt sales in November when borrowing costs climbed.

As China’s government attempts to cool property prices with limits on lending, developers have embarked on a land grab.

Mr Li, who made his fortune in Hong Kong real estate, and hundreds of local developers boosted investment by 29 per cent in the first eight months of last year, the National Bureau of Statistics said.

‘If the government decides to impose further restrictions, most if not all of the developers will go bankrupt, depending on the severity of the restrictions,’ said Mr Eugene Kim, the chief investment officer of Hong Kongbased hedge fund Tribridge Investment Partners.

‘That makes us very selective in terms of which bonds we buy and the spreads we require to compensate for risk.’

Mr Kim said he has trades set up that would profit from a decline in prices. Merrill Lynch, the world’s biggest brokerage, rates China property companies as ‘underweight’, meaning investors should own a smaller percentage of the debt than contained in benchmark indexes.

Home prices in Shenzhen, a city north of Hong Kong, were 18.6 per cent higher in November than a year earlier, according to a National Development and Reform Commission survey. They rose 14.9 per cent in the capital city of Beijing and 16.4 per cent in Beihai, in Guangxi province.

The People’s Bank of China last month raised its benchmark one-year lending rate to a nine-year high and increased reserve requirements to the most since at least 1998. Beijing increased the minimum down payments on apartments to 40 per cent from 30 per cent in September.

Signs of a shift are already emerging. The nation’s largest publicly traded developer, Shenzhen-based China Vanke, sold property worth 4.23 billion yuan (S$833 million) in November, 18 per cent less than in October.

Chinese developers are among the most vulnerable of any group in Asia to downgrades because a slowdown in home sales would deplete cash, said Ms Clara Lau, an analyst at Moody’s Investors Service in Hong Kong.

‘They have been growing aggressively, with the view that if they don’t buy now, it will be more expensive for them later’ to acquire land, Ms Lau said.

Standard & Poor’s cut the credit ratings of Greentown China Holdings, the largest builder in Zhejiang province, by one level to BB- on Dec 3 due to ‘increasingly aggressive land acquisitions’.

Greentown China’s US$400 million (S$573 million) of 9 per cent bonds yield 11.2 per cent, up from 9.6 per cent in November.

THE rapidly rising yields in China’s bond market are telling Mr Li Ka Shing, Asia’s richest man, that he is sitting on a property bubble which is bigger than the one deflating in the United States.

Bonds of China’s Agile Property Holdings yield 7.03 percentage points more than US Treasuries, double the premium in July and 1.65 percentage points more than the debt of Los Angeles- based KB Home, which has the same credit rating.

 

Source: BLOOMBERG NEWS (The Straits Times 10 Jan 08)

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