In the five years since the introduction of the "three red lines" policy designed to reform the Chinese property market, the country’s real estate sector has endured significant challenges, leading to higher defaults and a sharp market contraction. Does this mean that China property credit is dead? In our view, the answer is “no.” While the sector has yet to see a fundamental turnaround, we see a clearer path to recovery.
Importantly, the sector has undergone a fundamental transformation, emerging from a painful correction as a smaller, cleaner and higher-quality universe. Index weights have shrunk dramatically: The China property high yield weighting within the JP Morgan Corporate Emerging Markets Bond (CEMBI) Broad Index has dropped from 8.94% in 2020 to 2.17% in August 2025, while the JP Morgan Asia Credit Index’s (JACI) high yield segment has declined from 38.21% to 7.27% over the same period. Only the truly well-managed and strongest have survived—a mixture of state-owned (SOEs) and privately owned enterprises (POEs)—with most now focused on building recurring income and targeting select residential properties.
The physical market recovery remains highly uneven. Tier 1 cities and investment properties are showing signs of stabilization, with sales values up 13.4% year-over-year (YoY) and land sales gross floor area (GFA) rebounding 14.8% in the first seven months of 2025. This follows a 23% decline in sales value and a 72% drop in GFA from 2021 to 2024. Primary average sales prices (ASPs) in Tier 1 core regions declined just 1.1% year-over-year in July 2025. Meanwhile, upgrade-focused properties—mostly units over 120 square meters—have proven more resilient amid market volatility.
In contrast, lower-tier cities continue to face headwinds due to high inventories driven by structural oversupply and weak demographics, with sales value down 52% from 2021 to 2024, and declining by an additional 5% in the first seven months of 2025. Primary ASPs in Tier 3 cities dropped 4.2% YoY in July 2025, following a 10.9% decline over 2021 – 2024. In our view, this divergence underscores the need for asset allocators to analyze issuer exposure carefully—focusing on city tier, asset quality and product mix to identify potential winners and losers.
Government policy remains gradual in emphasis, but the sector's stabilization goal is clear. The September 2024 Politburo meeting marked the first explicit commitment to setting a bottom for property markets. This was followed by targeted measures to boost affordability and relax purchase restrictions in Tier 1 cities, while most lower-tier cities already have limited home purchase restrictions.
The easing measures have spurred a moderate recovery in sales and softening ASP declines. While policy actions are incremental rather than sweeping, the intention to stabilize and ensure social stability is evident. We believe this “bottom-line thinking” should create a more predictable environment for investors as the recovery takes hold.
Signs of Recovery
Primary National Sales Value by City Tier
Rmb (Billions)
Source: Citi, National Bureau of Statistics of China (NBS), China Real Estate Index System (CREIS), as of July 31, 2025.
Primary Average Sales Price Index by City Tier
Source: Citi, National Bureau of Statistics of China (NBS), China Real Estate Index System (CREIS), as of July 31, 2025.
Financing projects remain fragmented depending on the issuer. SOEs currently enjoy stable, low-cost funding: Bank loans remain the backbone of sector debt at 73%, while SOEs typically access onshore bonds at interest rates of 3.5 – 4.5%, with renewed access to offshore markets recently reflecting improved investor confidence.
POEs, in contrast, face tougher conditions. However, the more resilient POEs are increasingly pivoting to property management and rental businesses to generate incremental liquidity. Many have successfully accessed alternative funding channels, such as investment property loans, leveraging sizable commercial asset portfolios. With secondary market bond yields stabilizing below 10%, select POEs have also regained access to offshore capital markets, providing an additional source of liquidity for refinancing and operations.
For investors, China real estate (CRE) credit offers what we consider an attractive yield premium. The average yield for CRE high yield stands at 9.19% (B+), notably higher than broader emerging markets high yield at 8.04% (BB-).1 With most distressed names now removed from major indices, we believe this elevated yield reflects lingering risk perception rather than current fundamentals, which continue to stabilize. Sectoral default rates have been normalizing, and we expect them to return to single-digit levels in fiscal 2026 for the first time since 2021. In the first half of 2025, CRE delivered an average return of 7.33% and its high-yield subsector returned 8.32%, significantly outperforming the CEMBI Broad Diversified High Yield Index’s 3.91% return.
Improving Fundamentals Show Up in Returns
China Real Estate vs. Major Indexes: 1H2025 Return
Source: JPMorgan CEMBI Broad Diversified High Yield Index, Bloomberg Pan-European High Yield Total Return Index, Bloomberg U.S. Corporate High Yield Total Return Index, JP Morgan CEMBI Broad Diversified China Real Estate Index as of June 30, 2025.
In sum, China property credit is not only alive, but, in our view, fundamentally improved and offering outsized yields. For asset allocators, we think CRE represents a compelling risk-adjusted opportunity; policy stabilization and sector stability should support survivors, but careful analysis of issuer exposure will likely be crucial to identifying the relative winners. In our view, the uneven physical market recovery, combined with determined government intervention, has to some extent put a floor under the market, creating real opportunities for the first time since the introduction of the “three red lines” in 2020.
