Earlier this month Bloomberg announced that it had launched a new metric to measure stress in Chinese onshore and offshore bond markets. The Bloomberg China Credit Tracker aims to show the stresses in the riskiest parts of the country’s onshore and offshore credit markets by way of a barometer. To date China’s corporate credit market is second only to the US, and has also been one of the safest due to the government backstopping even the most reckless companies. However, as the Chinese administration forces more accountability on its weakest companies, the risk of default will of course rise.
However, as Bloomberg puts it: Removing government support in order to close that gap is a delicate process. Allow too many firms, or the wrong ones, to fail, and investors’ faith in the overall market will wobble, triggering precisely the crisis that Beijing wants to avoid. Bloomberg’s China Credit Tracker is one metric by which to evaluate this high-wire act. By using public and proprietary data, it shines new light on stress in the riskiest corners of the country’s onshore and offshore credit markets.
A lot of investors have been looking at both local and offshore Chinese debt markets for a while now; here at SSC we have always maintained that the only issuers that international investors should consider ought to be the central government issuance and if absolutely necessary the policy banks. All other credits should be avoided as it is very difficult to figure out which credits will be supported, and which will not. This is more important than ever now. More significantly, if investors are exposed to RMB denominated assets then the major driver of returns is the exchange rate; why try and get an extra few basis points in return from holding riskier issues when the renminbi may appreciate significantly?
We continue to believe that investing in an investment grade pan-Asian bond fund, that although not 100% invested in Chinese bonds, has the bonus of the trickledown effect from China is a far better and safer way of not only benefiting from China exposure but also the protection of capital. This is particularly important when taking into account that the average China Bond Fund has a BB or Junk average credit rating.
Of course, there are risks not only in China, but around the globe in the current climate, however, there is no need for investors to expose themselves to those risks unnecessarily if the primary driver of returns is in fact the currency above anything else. Our funds, where permitted, roll one-month CNH exposure, through the forex forward market, buying CNH forward the carry is built into the price of the forex contract and on average the one-month maturity yields 2.5% on an annual basis.
Lastly, this is it. 55 years of hurt will hopefully evaporate on Sunday evening. Is football indeed coming home? The bookmakers can’t split the teams or the result, all 3 outcomes after 90 mins are approximately 2/1. C’mon England.
Could be a weekend to remember. Enjoy.