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Government campaign to reduce debt in sectors such as real estate has put many developers in tight spot, sending high-yield bond prices tumbling

The latest Chinese market to buckle under pressure from Beijing’s wide-ranging corporate crackdown: junk bonds.

Companies from China make up the bulk of Asia’s roughly $300 billion high-yield dollar bond market, thanks to a surge in borrowing by the country’s heavily indebted property developers. But the investor optimism that drove that borrowing has collapsed.

Stress has been building following a string of debt defaults and growing concern about a few large issuers, including property giant China Evergrande Group. Sharp price declines in its bonds and those of a few other large Chinese companies, plus concerns about tighter regulation aimed at reining in speculation and soaring housing prices, have pushed the market over the edge.

“There’s a confidence crisis in Chinese high-yield debt,” said Paul Lukaszewski, head of corporate debt for the Asia Pacific region at Aberdeen Standard Investments in Singapore.

The average yield of non-investment-grade U.S. dollar bonds from companies in China topped 14% in late July and early August, around 10 percentage points above the average yield of junk bonds issued by American companies, according to ICE BofA Indices.

The gap between the two recently hit its widest level in a decade, showing how far prices of Chinese bonds have fallen relative to their Western counterparts. Bond yields rise when prices fall.

Many American debt issuers have benefited this year from the Federal Reserve’s easy monetary policy, which has kept interest rates low to spur growth as the U.S. economy rebounds from the coronavirus pandemic. China’s economy, in contrast, returned to expansionary mode last year, and Beijing has resumed a campaign to reduce debt levels in sectors such as real estate, which has put many developers in a tight spot.

The widening regulatory crackdown that sparked a big selloff last month in the shares of internet-technology and education companies has also weighed on Chinese credit markets, pushing down prices of even investment-grade bonds. The moves show China is getting more serious about reining in companies whose business practices are seen at odds with national priorities. Investors are now actively looking for sectors that might be next in the crosshairs.

“A lot of the tension is focused on the property sector, and it’s really been driven by [China’s] policy,” said Sheldon Chan, an Asia credit portfolio manager at T. Rowe Price in Hong Kong.

Regulators in the country late last year demarcated debt boundaries dubbed the “three red lines” for real-estate developers, requiring them to bring down their leverage before taking on new debt. Government officials have also rolled out numerous measures to curb speculation by home buyers and slow increases in residential property prices that had benefited many developers.

“The three red lines policy is proving effective to push developers to reduce debt, and cutting access to funds,” Mr. Chan said. “Along the way, some accidents will happen and some developers will run into default, which may bring some contagion and volatility,” he added.

Cash-strapped Evergrande—one of the country’s largest real-estate companies and its biggest junk-bond issuer—took on large sums of debt to help fund the building of residential properties in many cities across China. In June, it reported the equivalent of $88 billion in interest-bearing debt onshore and offshore. The company has more than $16 billion in U.S. dollar debt outstanding, according to S&P Global. Some of its dollar bonds are trading below 50 cents on the dollar.

Evergrande on Tuesday said it is in talks to sell some prized assets to raise cash, helping to lift its stock and bond prices. S&P this month cut Evergrande’s credit rating to CCC, saying the company’s liquidity is deteriorating more quickly than expected.

Its financial troubles have spilled over into the bond prices of other developers. One indicator of the extreme market dislocation is the average spread on Chinese bonds with single-B credit ratings.

That spread, or the additional yield these bonds pay over comparable Treasurys, was recently near 17 percentage points, according to Bank of America Global Research, even wider than it was in March 2020, near the height of the Covid-19 outbreak in China.

“It’s overdone,” said Aberdeen’s Mr. Lukaszewski, adding that the spread implies investors are expecting a 30% default rate. “This much negativity in prices is rare,” presenting an opportunity for investors who can figure out which companies will be able to weather the storm, he said.

While prices recovered slightly over the past week, many debt securities are still trading at deep discounts to their face value. An ICE BofA index that tracks Chinese high-yield debt is down 8.4% this year on a total-return basis.

For a long time, defaults among Chinese companies were few and far between, and many investors expected the government to step in and prevent large companies from failing and causing their bondholders to lose money.

That is no longer the case, as authorities in the country have shown a higher tolerance for corporate failures among state-owned and private enterprises. Recent defaulters have included a major real-estate developer, a state-backed chip maker and a coal producer.

In the past, the high-yield debt market has snapped back relatively quickly—as it did after the deep dive in corporate bond prices in March last year—benefiting both companies and investors. This time, however, market participants are hesitant to bet on a fast recovery.

“If there’s no clarity on a turnaround story, it would be brave to stick your neck out,” said Sandra Chow, co-head of Asia-Pacific research at CreditSights. The firm is expecting China’s real-estate companies to report unimpressive first-half results in the coming weeks. “The market is cheap, but it could get cheaper,” Ms. Chow added.

Insurgents’ advance on capital triggered Western evacuation efforts

KABUL—Taliban fighters on Sunday took over the Afghan capital as President Ashraf Ghani fled abroad, triggering a massive effort to airlift Western diplomats, civilians and Afghans likely to be targeted by the country’s new rulers.

Demoralized Afghan security forces offered no resistance as the insurgents, who seized most of the country in just over a week, appeared Sunday morning on Kabul’s outskirts. While the Taliban initially said they wouldn’t enter the city while a transitional government is being formed, they reversed their stance by nightfall, saying that someone needed to maintain public order after Afghan police deserted their posts.

“To prevent chaos and looting, the Islamic Emirate has ordered the mujahedeen to get control of the abandoned areas,” a Taliban statement said. The Taliban fighters, it added, won’t bother any civilian or military officials of the former regime.

By evening, the main road to the Kabul airport—packed with Afghans desperately trying to escape and with thousands of American troops protecting the evacuation effort—presented a bizarre scene of Taliban fighters mingling with uniformed Afghan troops.

Mr. Ghani, who fled the presidential palace and spent Sunday morning at the U.S. Embassy, left the Afghan capital in the afternoon. “God will hold him accountable and the people of Afghanistan will make their judgment,” Kabul’s chief peace negotiator said in a video message. A senior security official confirmed Mr. Ghani’s departure.

On Sunday morning, the administration of Mr. Ghani told all employees to go home. Soon after, sporadic gunfire erupted and some checkpoints were abandoned as panicked residents clogged the streets. By early afternoon, the Taliban took over Kabul’s main Pul-e-Charkhi prison, freeing thousands of inmates, videos on social media showed.

As the Taliban moved to seize Kabul, the U.S. Embassy sent out an alert Sunday night warning U.S. citizens in the capital to stay where they were, effectively putting a halt to America’s rushed efforts to get its citizens out of the country before the government collapsed.

“Do not come to the embassy or airport at this time,” the alert said.

Secretary of State Antony Blinken rejected parallels being made with the rushed U.S. exit from the U.S. embassy in Vietnam in 1975, when staff was evacuated by helicopter from the building’s roof. He said the aim in Afghanistan was to target al Qaeda, which had been achieved.

“This is not Saigon,” said Mr. Blinken, speaking to CNN on Sunday. “We went to Afghanistan 20 years ago with one mission, and that mission was to deal with the folks who attacked us on 9/11. And we succeeded in that mission.”

Helicopters had earlier ferried American and Western diplomats and civilians to the military side of Kabul airport. One after another, Chinooks and Black Hawks took off from the landing zone, spraying dust.

Below them was a city of traffic jams and roundabouts choked by cars—many of them filled with Afghans trying to reach the airport’s relative safety. Dark smoke, presumably from burning documents, rose from the presidential palace.

In the airport, large crowds gathered at the military gate, trying to get through the checkpoint. There was an exchange of gunfire, with a warning of a ground attack sounding in the terminal.

Dozens of gray U.S. Air Force and British transport planes awaited their passengers, the landing strip secured by newly arrived American troops.

Some of the evacuating Westerners waited on cardboard boxes marked with the words “non-Pork MRE,” or meal-ready-to-eat. Others—including Afghan dual citizens—nervously waited their turn for the shuttle bus that would take them to their planes, away from the city they would be unlikely to see again soon.

In Kabul, just before the Taliban takeover, long lines formed outside banks and at the city’s few functioning ATMs as residents rushed to withdraw their cash before it was too late. Few succeeded

The stunning meltdown of the Afghan state left the city in shock.

In a message to followers Sunday, the Taliban’s leader, Mullah Haibatullah Akhundzada, urged his fighters to treat conquered cities with a benevolent hand.

“The victories are coming, do not be arrogant and conceited, do not betray the spoils of war, and treat well those who surrender to you,” he said. “Do your best to avoid civilian casualties.”

The U.S. has rushed 5,000 troops to Kabul to secure the airport and help evacuate American diplomatic personnel. On Sunday, the Green Zone that contained much of the foreign presence emptied out as embassies closed or relocated to the military base in the airport.

“We have no idea what will happen from one moment to the next in this situation,” said Mohammad, a worker at a nongovernment organization. “But what can we do? There is nowhere for us to go. There is no chance to leave the city anymore.”

Afghans also mobbed Kabul’s passport offices, seeking to secure valuable travel documents while an internationally recognized Afghan government still exists—and while the airport continues operations. Not many were lucky.

Milad, a businessman at the passport line Sunday morning, said he had already managed to move part of his family to Turkey, but several others were stuck in Kabul.

“I never expected that Taliban will come again. Now everything is going to collapse,” he said. “In the presence of Taliban I don’t have any hope for the future of my country.”

Shortly thereafter, an announcement rang out that the passport office was closing because the Taliban had entered Kabul.