(Bloomberg) -- China’s junk dollar bonds are rallying to their highest level in three years amid government efforts to shore up the bruised property sector. 

The average price of Chinese high-yield dollar bonds has jumped 2.1 cents so far this week and is set for the biggest weekly advance in seven months. Prices have risen to 85.5 cents, according to a Bloomberg index, the highest since September 2021, just before Fantasia Holdings Group Co.’s surprise default cast a spotlight on the extent of China’s property-debt problems.

Top gainers this month included some of the survivors of the crisis, including China Vanke Co., Longfor Group Holdings and Seazen Group Ltd. Some of Vanke’s dollar bonds are poised for their largest daily gain Thursday since November last year. Its note due in 2027 jumped 6.3 cents on the dollar Thursday morning, while another one maturing in 2029 is up 6.7 cents.

Despite the rise in junk-bond prices among some property developers, a large portion of the market remains deeply distressed. Dollar notes of defaulted builders such as Country Garden Holdings and China Evergrande Group, which have been removed from the Bloomberg index, are still trading below 10 cents on the dollar.

Government policy is moving in the right direction and we could see light at the end of tunnel next year, said Ting Meng, senior credit strategist at Australia & New Zealand Banking Group Ltd. “If these policies [had] come earlier, the effectiveness will be much better,” she said.

Stock prices in the sector also surged on Thursday. A Bloomberg gauge of Chinese developers showed shares rising as much as 10%, led by defaulted developer Sino-Ocean Group Holding Ltd., which climbed 51%, and CIFI Holdings Group Co., which gained 25%.

This week’s rally comes as China’s government mulls added steps to stimulate demand in the property sector. China’s State Council is considering a proposal to have local governments across the country buy millions of unsold homes from distressed developers at steep discounts using loans provided by state banks. Many of the units will then be converted into affordable housing, Bloomberg reported on Wednesday.

Across China’s major cities, local governments are putting together efforts to loosen home purchase rules. Xi’an, the capital of Shaanxi province, and Zhejiang province’s capital of Hangzhou both scrapped all their remaining curbs on residential property purchases last week. 

At the end of April, Beijing said it would allow some families to buy an additional home in non-core areas.

“Beijing has realized how challenging it is to clear housing inventory and thus we see measures rolling out now,” said Ziqi Jiang, chief investment officer of Regent Capital Management. “The government wants to support the sector but not overstimulate it,” Jiang added.

--With assistance from Jackie Cai.

(Updates with addition of share prices, analyst comments)

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