(Bloomberg) — Goldman Sachs Asset Management is buying one of the world’s most distressed assets — Chinese real estate debt — even as other investors shy away. The firm has been adding a “modest amount of risk” through high-yield bonds issued by China property developers and denominated in U.S. dollars, said Angus Bell, a member of Goldman’s portfolio management team. The debt has sold off sharply over the last two months as China Evergrande Group, the world’s most indebted developer, moved closer to a potential default that could spread to the rest of the real estate sector.However, the market is overestimating the contagion risk, Bell said in an interview Friday. And that creates opportunities. “Ultimately the property sector has been the key driver of Chinese growth over the past two decades,” he said. “It’s unlikely the government will tolerate the impact on growth that would come about if it were to allow such a large number of developers to fail. The breadth of distress that the market is now pricing, it’s starting to look significantly out of alignment with the true extent of distress.”
A Bloomberg index of Chinese junk-rated dollar bonds has fallen 22% since the beginning of September while yields have soared, as the government reined in the property sector and a debt crisis at Evergrande deepened. Senior government officials have stressed that risks in the property market are controllable, and they’re loosening restrictions on home loans at some of the largest banks.
Goldman has also added Chinese government local currency bonds to its investments in what Bell described as a “risk-off” trade, based on People’s Bank of China’s willingness to provide liquidity in local markets as the economy slows.
At the end of October, economists surveyed by Bloomberg expected gross domestic product in the fourth quarter to reach 3.5%, almost a percentage point less than the forecast a month before. Bloomberg Economics says the central bank may cut banks’ required reserve ratios by another 50 basis points in the coming months, as the need for monetary policy easing climbs.
“We effectively see a requirement for policy makers and central banks to continue keeping liquidity conditions ample, particularly given the deteriorating growth backdrop and the demand for liquidity from the corporate sector,” Bell said. “Think of these as Chinese rates, where we’re being long or overweight on the view that the central bank keeps yields where they are, or if not, pushes them lower.”
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