A small Chinese real estate company could make waves in the fixed-income and related exchange traded funds markets, raising default concerns on U.S. dollar-denominated emerging market debt as the USD continues to appreciate.
Bond investors are watching China as Kaisa Group Holdings missed a $23 million interest payment earlier this month, which puts the company at risk of being the first Chinese real estate company to default on USD-denominated bonds, Bloomberg reports.
Ever since the Chines government began blocking approvals on property sales and new projects in some areas across China to rein in an overheating housing market and fight against corruption, borrowing cost among many developers have surged. For instance, yields on Chinese dollar-denominated speculative grade debt rose to 12.38% on January 16, the highest since June 2012.
Additionally, observers are worried that the mounting financial stress could spill over into a broader credit crisis in China.
Chinese local-currency-denominated bond ETFs have also been weakening so far this year. Year-to-date, the PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSEArca: DSUM) dipped 0.8% and Market Vectors ChinaAMC China Bond ETF (NYSEArca: CBON) fell 1.2%. The Global X GF China Bond ETF (NYSEArca: CHNB), though, remained flat.
Moreover, the quickly appreciating U.S. dollar has not been any help to borrowers with U.S. dollar-denominated loans. The stronger dollar makes repayments costlier for emerging market borrowers since it takes more local currency to repay a single dollar than it did before the surge in the greenback against foreign currencies mid-2014.
Companies in China have a large exposure to USD-denominated debt. Chinese companies made up 62% of all U.S. dollar bond sales in the Asia Pacific region ex-Japan in 2014, issuing $244.4 billion of $392.5 billion worth of loans.
Looking at potential risks in the fixed-income ETF space, the strengthening U.S. dollar could raise credit risk for emerging market bond ETFs as an appreciating dollar would make it harder for emerging market companies to repay debt obligations. The iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), which both track USD-denominated emerging market debt securities, have increased 6.2% and 8.9%, respectively, over the past year. [King Dollar Makes a Pauper of Some EM Bond ETFs]
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.