(Bloomberg) — Chinese developer stocks and high-yield dollar bonds fell, as market optimism generated by Beijing’s policy vows further eroded after leaders reaffirmed support for strict Covid policies.

Bloomberg Intelligence’s index of property stocks dropped as high as 4.1% on Friday. Meanwhile, a gauge that tracks junk dollars was expected to drop for the third consecutive week.  

The nation’s ailing property sector poses a serious risk to China’s economic growth target without “immediate and substantive policy easing at the national level,” according to Pacific Investment Management Co.

The Key Developments

• China’s Leaders Warn Against Questioning Covid Zero Policies
• Evergrande sales jump to 3.09b from 20m-30m Yuan
• Chinese Courts Holding Up as Defaults, Bankruptcies Mount: S&P
• Evergrande Unit Receives 6-Month Extensions for Yuan Bond Payments

Credit risks rise to two-year high due to Stagflation (11:28 pm HK).

In the face of slower growth and higher inflation, credit markets are once more vulnerable. There is also a greater rout in risk asset prices. This has led to the rise in the cost for insuring default debt. 

Trader reports that credit default swaps for Asia ex Japan high-grade debt increased about 4.6 percentage points to 131. That’s the highest since April 2020 and leaves them set for the worst weekly blowout in eight months, an iTraxx index shows. Also, a North American gauge saw its largest in nearly two years. 

Three-Day Down Week of High Yield US Bonds from China (9:47 AM HK).

Credit traders reported that the Chinese high-yield dollars bonds dropped 0.5 to 2 cents per dollar on Friday morning. This was in addition to stocks in Asia following an overnight decline in U.S. equity markets.

The Bloomberg index tracking the country’s junk-rated notes is on pace to drop for the third week in the past four.

Sino-Ocean Capital Purchases $67m in Dollar Bonds by Unit (09:13 AM HK).

According to late Thursday filings to the Singapore Exchange, Sino-Ocean Capital Holding Ltd. purchased $67 Million of two-dollar bonds from unit Mega Wisdom Global Ltd. 

These purchases included $64 Million of a note due Oct 25th and $3,000,000 of a bond due February 2023. Sino-Ocean Capital was a guarantor for both bonds.

Swaps Committee will Rule If Sunac is in Failure-to Pay Credit Event

According to a statement posted on the website, Credit Derivatives Determinations Committee decided to examine whether Sunac China Holdings Ltd. was subject to a failure to pay credit event.

On May 6, the committee will discuss whether credit default swaps could be activated.

Chinese Bankruptcies Mount and Chinese Courts Are Holding up as Defaults.

China’s legal system “has become much more adept at handling defaults,” said S&P Global (NYSE:) Ratings while predicting corporate failures are poised to stay elevated.

Bankruptcy cases in domestic courts have grown eightfold since 2018, but the legal system has kept pace, said Charles Chang, the firm’s Greater China country lead for corporates. 

Still, “the rapid rise in failed firms in corporate China creates contagion risk and a greater need for orderly post-default resolution.”

Evergrande Unit gets Bond Extensions (8:00 AM HK).

Evergrande’s onshore unit won bondholder approval to extend payments originally due Friday by six months on two yuan notes, according to filings to the Shanghai Stock Exchange.

The put date and coupon for the subsidiary’s 6.8% yuan bond due 2024 have been changed to Nov. 6, according to the filing.

Beijing Faces a Further Meltdown Without Taking Action: Pimco (8:00 a.m. Hong Kong)

China’s 2022 economic-growth target is at serious risk from the ailing property sector absent “immediate and substantive policy easing at the national level,” says Pimco.

China risks “further sector meltdown both in the physical property and capital markets,” credit researchers Annisa Lee and Frank Chen wrote in a blog post dated Thursday.

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