A construction site in Shanghai. The resilience of Chinese property debt contrasts with a steep decline in business.
Photo: Qilai Shen/Bloomberg NewsEven as home sales in China have dried up due to the deadly coronavirus, international bond investors are keeping faith with major real-estate groups.
The resilience of Chinese property debt contrasts with a steep decline in business, as developers have been forced to close sales centers across the country, and with a decline in property shares signaling that the sector’s earnings are likely to suffer.
In a Feb. 26 note, Goldman Sachs analysts said recent property-sales volume across 30 major cities was barely a quarter of the seasonal norm. Heavyweight China Evergrande Group, the country’s most indebted developer, has moved to drum up business with promotions such as offering steep discounts for residential property purchases made online.
Despite the challenges, credit markets appear confident that big players have the financial firepower to withstand months of disruption. It helps that many companies issued dollar debt in the first few weeks of this year, shoring up their ability to meet coming obligations.
For example, some recently issued dollar bonds from Evergrande, which pay 11.5% coupons and are due in 2023, were quoted at about 99.1 cents on the dollar on Friday, according to FactSet data. Five-year bonds in rival Kaisa Group Holdings, also issued in January, were quoted at 96.8 cents on the dollar. A brief selloff in some sector bonds began in late January but largely retraced within two weeks.
The strong performance also reflects a widespread belief that Chinese authorities could offer extra support to an economically significant sector if needed.
“The government will be pulling whatever levers they can to help this industry through this crisis,” said Charles Macgregor, head of Asia at Lucror Analytics, a credit-analysis firm. Mr. Macgregor said home purchases should normalize as life returns to normal in the second quarter.
Likewise, Freddy Wong, head of Asia Pacific fixed income at Invesco, said: “We didn’t see a major sell off as the market is expecting incremental policy support as the situation settles down in the coming days and months.”
Given the importance of a healthy property sector to China’s economy, Mr. Wong said the government could take measures such as cutting down-payment requirements for home buyers and easing restrictions for firms on buying land for future development.
Some existing moves should also help developers’ finances. Local governments have stepped in with a variety of short-term measures, including tax relief, easier bank-loan approvals, and allowing developers to extend project delivery dates, according to research from Lucror.
Authorities are also giving developers more leeway to borrow in foreign currencies, something the state usually controls tightly.
The National Development and Reform Commission, the agency that sets quotas for such offshore borrowing, said in February that it would extend deadlines for using up existing quotas by six months. Such an extension would be handy for weaker borrowers, who might struggle to sell debt in volatile times, since they could wait for market conditions to improve.
The country’s developers are avid borrowers and their bonds are widely held by international investors. Stretched balance sheets mean many firms lack investment-grade credit ratings, so the sector makes up a particularly large part of Asia’s high-yield dollar-bond market.
The average price for an ICE BofA index of Chinese high-yield corporate credit was nearly 99 cents against the dollar on Feb. 29, with effective yields of about 7.4%. In contrast to the recent performance, the property-heavy index sold off sharply in late 2018, with yields topping 11% and prices falling below 90 cents on the dollar.
In the equity market, the S&P China Property Index is down about 7.2% in the year to March 2, according to S&P Global Market Intelligence.
If the coronavirus causes a long downturn in sales, some developers could face greater strains.
In a recent report, Moody’s Investors Service said most of the Chinese developers it tracks had “adequate liquidity to buffer against the disruption in sales” this quarter. It was referring to companies to which it has assigned credit ratings, and which publish contracted-sales data. However, Moody’s said some weaker players could be vulnerable if property transactions continued to sputter in the next three to six months.
Jiang Yuhui, an analyst at China Securities, said Chinese developers could likely weather weak sales for another quarter before some smaller ones might collapse.
“It all depends on how fast the virus can be contained,” he said, “The demand [for housing] hasn’t vanished, [it is] only getting delayed.”
The comparatively high yields of Chinese property debt, in a low-interest-rate environment, add to its appeal for some investors. Sheldon Chan, an associate portfolio manager and emerging-market credit analyst for fixed income at T. Rowe Price, said Chinese credit looked attractive compared with high-yield debt anywhere in emerging markets.
Mr. Chan said larger Chinese developers had proven they had access to credit from local banks and onshore capital markets and the ones he tracked had limited exposure to Hubei, the province at the center of the epidemic.
He said Chinese property bonds could rally this year, given possible stimulus and the likelihood that developers would sell less dollar debt this year than in 2019.
Write to Frances Yoon at frances.yoon@wsj.com and Stella Yifan Xie at stella.xie@wsj.com
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