Asia bond funds dump China for cash

After incurring significant losses in China’s corporate bond market, bond fund managers with strategies centred on Asian high-yield issuers have shifted to cash and other non-China assets.

China’s real estate market experienced a record number of defaults in 2022 among leading private developers and even some state-owned firms, despite once being a sought-after investment that accounts for more than half of Asia’s high-yield corporate bond issuance.

Capital exodus brought on by rash Federal Reserve interest rate increases dealt further damage to the already frail sector. In her more than 20-year investment career, Monica Hsiao, founder and chief investment officer of Triada Capital, an Asia-focused credit long-short fund, claims she has never faced a situation like this one.

Hsiao, who established the fund in Hong Kong in 2015, stated: “we hold over 50% of cash, higher than any time historically.” Prior to founding Triada, Hsiao managed Asia credit for London-based credit-focused asset manager CQS, but she withheld information about the fund’s size and performance.

More than 20 Chinese real estate developers with Moody’s ratings have defaulted since the start of 2021, which has increased the proportion of Asian high-yield enterprises with junk ratings to a historic high.

The price of China’s high-yield bonds has been below 20 cents on the dollar for many of their owners. Sunac China’s defaulted notes with a 2025 maturity trade at 6 cents to the dollar.

According to recent data, the top 10 Asia high-yield bonds have experienced an average return decline of more than 30% this year, with Fidelity Funds’ Asian High Yield Fund and UBS’s SICAV – Asian High Yield (USD) experiencing losses of more than 40% as of October 27.

Since stringent restrictions on developer borrowing were put in place by officials in the middle of 2020, the real estate market, which is essential to China’s political and economic stability, has suffered a significant decrease in prices and sales.

Investors expected legislative initiatives to support real estate demand this year, but according to Hsiao, nothing like that happened. As the prospect of U.S. inflation and geopolitical threats intensified in the summer, Hsiao continued to cut her fund’s exposure to China from the first quarter.