The Chinese government has once again got the property market in its crosshairs. It laid out some new guidelines on March 1, in an attempt to cool down rising property prices and crack down on speculation. The government is strictly imposing capital gains tax of 20% on profits from secondary sales, which was previously rather haphazardly applied. It is also putting further restrictions on who can buy a secondary home, and raising down-payment and mortgage rates for property buyers.
But these measures will not take the oomph out of the high yield debt market, where Chinese property companies have been by far the biggest source of supply. Property developers are also not expecting a big impact on the primary housing market, according to analysts — and investors appear to agree with them. Chinese property bonds did fall on Monday, but only by around a point, and they started to recover the next day.
The secondary bond reaction — or lack thereof — is a good sign for bankers who have understandable fears about oversupply. There was a rush of issuance from the sector in January, and although that slowed down in February, it was still pretty much the only sector supplying deals. DCM bankers are now plotting plenty more transactions before the end of the year. They will not have to wait long. China Vanke, one of the best-regarded in the sector, is now on the road with its own deal.
There have certainly been complaints from some investors about the extent of bond supply from the sector, and the Chinese government threatened to exacerbate these fears with its announcement last week. But the truth is, for high yield investors, Chinese property is still the only game in town — and few bond buyers can turn their back on double-digit yields.
The spate of supply from the Chinese property sector may hit a brick wall at some point, pushing secondary prices right down and bringing the flow of deals to an abrupt halt. But that is not going to happen just yet — and it will take plenty more than the latest government rules to take the excitement out of such a lucrative part of Asia’s debt market.