PERSPECTIVE3-5 min to read

Video: Asian Credit: Is China property causing contagion in other sectors?

While the macro environment is challenging for China credit in the short-term, we do continue to see opportunities in Chinese internet platforms, Greater China retail companies and Macau gaming.

07/09/2023

Authors

Jianan Huang
Fund Manager, Asian Credit

In recent months, slower economic growth in China and headlines related to property and trust sectors have weighed on investor sentiment. With measures to support the housing market thus far being incremental and targeted, sentiment has not been lifted much. This month, we take a quick look at some topics at the top of investors’ minds and assess its implications on Asia credit.

What is the outlook for China property going forward?

We expect further deterioration in the operating environment amid weak homebuyer sentiment and contracted sales. While recent policy fine tuning may help drive housing demand, especially in top tier cities, markets will need more time for confidence to recover. Meanwhile, sentiment remains fragile and refinancing channels stay shut to the highly levered developers.

Has China property issues led to contagion in trust products?

The property cycle downturn has led to some contagion in trust products over recent weeks. Generally, we do not expect this to lead to systemic risks as trust products are typically closed ended and represent a small percentage of total banking assets.

Does rising local government financing vehicle (LGFV) debt pose higher systemic risks?

Rising local government financing vehicle (LGFV) debt may pose higher systemic risks as the total size of LGFV debt is estimated at around 14% of total banking assets.

While sluggish land sales may continue to weigh on LGFVs’ balance sheets, we believe authorities could continue to strive to avoid LGFV public bond defaults in the near term due to wider implications on systemic risks and financial stability in China.

We remain positive on China

Despite the challenges, it is not all negative for bond investors.

While the macro environment may remain challenging for China credit in the short-term, this should be limited to well-demarcated weak spots in China such as property, financials and LGFVs, and we do not expect recent volatility to lead to rating pressure for most other segments particularly investment grade.

With China’s recovery thus far being more skewed towards services sectors such as travel-related consumption; we continue to see opportunities in segments such as Chinese internet platforms, Greater China retail-oriented companies and also Macau gaming.

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Authors

Jianan Huang
Fund Manager, Asian Credit

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