China’s junk dollar debt market is extending declines after the worst slump in five months, amid investor disappointment with long-awaited restructuring plans recently unveiled by defaulted developers.

A Bloomberg index of the country’s high-yield dollar notes, dominated by real estate firms, edged down in April after suffering its weakest month since October with a 3.7% loss in March. In contrast, high-grade counterparts gained 1.6% last month, part of a global rally.

As a result, stress in China’s broader offshore credit market eased to level 3 from 4 in February, according to Bloomberg’s China Credit Tracker. The gauge indicates rising levels of financial strain via a band from 1 to 6.

Many investors remain skeptical about the immediate benefits from a string of developments last month on debt restructurings at delinquent firms from China Evergrande Group to Sunac China Holdings Ltd.

The broader picture with the housing market remains mixed, leaving some doubts on builders’ ability to implement restructurings smoothly. The sector is showing some early signs of stabilization after the government increased support for cash-strapped developers, with home sales rising in recent data. But indicators of future construction have remained weak, with residential property investment continuing to decline.

“Recent debt restructuring proposals of distressed Chinese developers are mostly debt extensions rather than sustainable and permanent restructuring,” Fitch Ratings analysts including Samuel Hui wrote in a recent report. The viability of many developers and their ability to generate sufficient and sustainable free cash flow will remain in question, they added.

Evergrande, the epicenter of China’s unprecedented property debt crisis, still sees most of its dollar bonds trade below 10 cents, after it released a long-delayed proposal that offered new securities with maturities of up to 12 years or shares-linked notes. The plan, described by Nomura Holdings Inc. as setting a “low bar,” has renewed concerns about global investors’ long struggle to get their money back from Chinese defaulters.

Sunac, once among the nation’s top five developers, laid out details of a similar plan last month, under which offshore bondholders’ recovery looks “precarious,” according to CreditSights Inc. Most of the developer’s dollar notes remain deeply distressed at levels below 25 cents.

Meantime, more Chinese builders have shown strains, signaling that the latest recovery in home sales has yet to significantly ease the sector’s cash crunch.

Central China Real Estate Ltd., for example, warned earlier this month that it won’t be able to fully repay $897 million of dollar bonds maturing this year if investors don’t agree to a debt exchange.

“Many of the restructuring proposals are not really favorable for investors, but more like investors have to accept it,” said Kenny Chung, a Hong Kong-based portfolio manager at Astera Capital Partners. “The property market also shows slower recovery, signs which don’t give investors good incentive to add property positions.”

To be sure, others have flagged potential for investments.

Goldman Sachs Asset Management, for one, said it still sees opportunities for “strong returns” in Chinese property high-yield dollar notes as business prospects have improved and bond prices still average around 50 cents on the dollar.

And for China’s local credit market, it’s continued to recuperate from an abrupt selloff late last year induced by optimism about a reopening economy, with Bloomberg’s tracker showing stress there unchanged at level 3 last month.

The risk premium on five-year top-rated onshore corporate bonds over corresponding government debt has fallen to the lowest since November.

An unprecedented rally in Chinese developers’ junk dollar bonds is losing steam, pushing the market toward a crossroads as investor views diverge and borrowers greet banks’ deal pitching frenzy with caution.

The country’s high-yield dollar notes, dominated by those of real estate firms, lost 1.8% to 78 cents last week, a Bloomberg index shows, ending a record 13-week winning streak that was fueled by Beijing’s sweeping property rescue campaign and optimism about a reopening economy.

The earlier rebound from a record low in November helped push the stress gauge for China’s offshore credit market in January to level 2, down from 3 in December. It marked a fresh low for Bloomberg’s China Credit Tracker since data compilation began in May 2021. The tracker indicates rising levels of stress via a band of 1 to 6.

The pause to the bull run coincides with other signs of a market reaching a critical juncture, as investors debate the merits of chasing further policy-induced upside against caution arising from a persistent housing slump and default risks. Meantime, global investment banks are renewing efforts to end a yearlong drought in developers’ dollar bond sales, only to find borrowers still wary of prohibitively expensive financing costs.

“The key is whether it’s a U-shaped or L-shaped recovery. But there is no certainty in that,” said Zhi Wei Feng, senior analyst at Loomis Sayles Investments Asia Pte. “No more default and some successful cases of debt restructuring progress are key to discerning whether the policies are effective enough to support a U-shaped recovery.”

Some investors say the recent rally offers enough evidence that the worst of China’s property crisis is over. BEA Union Investment Management Ltd., which was underweight Chinese builders’ dollar debt for over a year, re-entered the sector late last year and still believes such bonds offer “the most attractive buying opportunities” in China’s credit market.

Once one of the hottest trades in the world, Chinese developers’ dollar bonds have imploded in the last two years as a government crackdown on high debt and a housing slump caused yields to surge and defaults to hit records. The turnaround has emerged since November, when Beijing stepped up efforts to salvage the ailing housing market, pushing average yields down to about 16% from a record 31%.

But to others, the recent rally was more of a reflection of better sentiment rather than material improvement in industry fundamentals.

“The sense of euphoria was caused by investors’ fear of missing out instead of rekindled interest in property bonds,” said Eddie Chia, portfolio manager at China Life Franklin Asset Management Co. “The rally could morph into volatility any time as investors shift their focus to fundamentals in the next few months.”

There are plenty of warning signals. China’s home sales continued to slump in January, even after policy makers expanded stimulus for the sector and the nation abandoned its Covid restrictions faster than expected. That prompted developers to flag the worst earnings in years.

“Homebuyers are still wary of buying houses from defaulted developers,” said Ben Bennett, head of investment strategy and research at Legal & General Investment Management Ltd. “Investors are still waiting for better clarity on how home sales and the financing plans will turn out.”

The diverging outlooks are also showing up in the primary dollar bond market, where global investment banks are renewing efforts to revive developers’ debt sales following a yearlong drought.

Driving the momentum were the two recent offerings by major conglomerate Dalian Wanda Group Co.’s property arm after a 16-month absence. Bankers are urging borrowers to seize the issuance window as much as they can. However, many developers appear reluctant and prefer to wait until yields drop further.

In the onshore credit market, stress eased to level 4 last month from December’s record level 6, after a reopening-induced selloff in government and high-grade corporate paper subsided.

Official defaults in the local bond market remain scarce, thanks to various types of support from easier access to funding to debt compromises with investors to preserve stability.

But beneath the surface, stress continues to manifest itself in other forms, notably the maturity extensions that distressed developers keep imposing on bondholders. Times China Holdings Ltd. became the latest such example, after a key onshore unit proposed a holistic restructuring plan for all its yuan bonds to some creditors