Short sellers double bets against China Evergrande’s bonds

Evergrande Real Estate Group Ltd updates

Sign up to myFT Daily Digest to be the first to know about Evergrande Real Estate Group Ltd news.

International investors have more than doubled their bets against under-pressure developer China Evergrande’s bonds, in a sign of market sentiment souring further on one of Asia’s most prominent dollar borrowers.

The face value of Evergrande bonds that have been lent out to other investors has risen close to $400m, more than twice what it was at the start of June, according to data from Markit.

Almost $170m of the company’s $2bn bond that matures in 2022 is out on loan, up from $50m at the start of the year. The bond was trading at 57 cents on the dollar on Wednesday, compared with almost par in May.

The data serves as a proxy for bearish bets against Evergrande. Investors short bonds by borrowing and selling them, hoping to buy them back later at a cheaper price and return the bond to its original holder having pocketed a profit.

The investor moves against Evergrande have coincided with a traumatic period for the business and China’s other massively indebted developers.

Evergrande has sought to reduce its vast debts as part of a state-ordered deleveraging effort across the sector. But the developer has been besieged by an almost daily stream of incidents that have raised concerns about its financial health, including asset freezes and sales suspensions on some pre-sold developments.

Evergrande had Rmb674bn ($104.3bn) of interest-bearing liabilities as of March. Its shares are down 64 per cent this year.

China is the second-largest dollar corporate bond market in the world at $425bn, trailing only the US, according to Bank of America, with more than half of its $100bn high yield market trading at distressed levels. Evergrande makes up 6 per cent of the Bloomberg Barclays Asia High Yield index.

Markets were already on edge this year after the default of China Fortune Land Development, which included BlackRock and HSBC funds among its investors, as well as delays in the release of bad debt manager China Huarong Asset Management’s financial results. Bank of America analysts warned in July that the potential for strain in the Chinese market to ricochet across the globe “represents the most significant risk to global credit markets at this point”.

Evergrande is not the only Chinese developer being targeted by short sellers. Bonds issued by Yuzhou Group Holdings and Shimao Group Holdings that have been loaned out are up from less than $200m at the start of June to $280m and over $400m, respectively.

This year, investors in Chinese developer bonds have on average lost 13 per cent versus losses of 2.7 per cent across the entire Asian high yield market, according to Barclays data.

“Investors have had to rethink their views about the sector,” said Avanti Save, head of Asia credit strategy at Barclays, adding that the Chinese government “wants [its] contribution to the economy to be less than it has been in the past”.

Investors had piled into Chinese real estate via dollar-denominated bonds market on the back of rapid urbanisation across the world’s most populous country. The high yields available also offered an attractive alternative to low interest rates in the west. 

But the government’s “three red lines” policy, which aims to limit developer borrowing according to a trio of balance sheet metrics, has signalled Beijing’s concerns over debt and raised questions over its future role in the economy.