Goldman Sachs Begins Buying Chinese Real Estate Bonds Amid 'Sharp Price Drop'

[Photo by Reuters]

[Asia Economy Reporter Park Byung-hee] Amid a sell-off in Chinese real estate bonds, Goldman Sachs has reportedly taken the opposite approach by buying, Bloomberg News reported on the 8th (local time).

Angus Bell, portfolio manager at Goldman Sachs, said in an interview on the 5th, "Goldman Sachs Asset Management is adding a moderate level of risk through high-yield dollar bonds issued by Chinese real estate developers." This means they are purchasing dollar bonds of Chinese real estate companies whose prices have fallen significantly.

As China’s second-largest real estate developer, Evergrande Group, fell into a liquidity crisis, Chinese real estate bonds have been subject to a sell-off over the past two months. This was due to concerns that Evergrande was on the brink of default and that the resulting crisis could spread throughout the Chinese real estate market.

Bloomberg’s Chinese junk (non-investment grade) bond prices have fallen 22% since early September. The ICE BofA index yield for Chinese junk bonds also rose to 25.77% on the 5th, marking the highest level since March 2009. Bond yields move inversely to bond prices.

However, Bell said, "The market is overly worried about the risk of contagion from the Evergrande situation," and that this is actually creating investment opportunities. He added, "Real estate has been a major driver of China’s economic growth over the past 20 years," and "The Chinese government will not tolerate real estate impacting the economic growth rate." This implies an expectation that the Chinese government will intervene if there is a risk of a chain reaction of real estate company bankruptcies.

Bell also revealed that Goldman Sachs is increasing its holdings of Chinese government yuan-denominated bonds. He explained that if the Chinese economy slows, the central bank, the People’s Bank of China, will willingly inject funds, making Chinese government yuan bonds a risk-off trade.

In a Bloomberg survey at the end of last month, economists predicted that China’s economic growth rate for the fourth quarter of this year would slow to 3.5%. This was about 1 percentage point lower than the forecast in the survey conducted at the end of September. As the risk of economic slowdown increases, economists expect the People’s Bank of China to cut the reserve requirement ratio by an additional 0.50 percentage points within a few months.