Analysis | September 8, 2022
China High Yield – Have We Reached the Bottom?
Capital at risk. The value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the full amount invested.
The China high yield market experienced a rapid recovery in August. What’s changed?
August was a notable month for Asia high yield, with the market up 3.13%,1 and the China high yield market up a staggering 9.5%.2 This was in sharp contrast to Western markets such as US high yield which fell 2.42%3 and European investment grade which was down 4.25%.4
This notable recovery may come as a surprise following a long period of volatility and negative price action, specifically around the Chinese property sector, which comprises a large proportion of both markets. What has brought about this rapid reversal in performance?
In our view, the key factor has been the significant amount of broad policy loosening that has lifted sentiment and improved the economic outlook across China.
1.Monetary Policy
In August, the People’s Bank of the Republic of China made several cuts to rates. It cut one of its key interest rates in a surprise move – with its one-year medium term lending facility loan (MLF) falling by 10bps from 2.85% to 2.75%. It also made two cuts to its benchmark lending rates; the one-year loan prime rate (LPR) from 3.7% to 3.65% and the 5-year LPR from 4.45% to 4.3%, thus reducing mortgage rates for first time buyers.
2.Fiscal Policy
Towards the end of August, the Chinese government announced RMB300bn of funding, much of it aimed at supporting infrastructure development projects, as part of a 19-point plan to boost economic growth.5
3.Looser Regulations
Six key provinces, which account for c. 45% of GDP, were asked by the national government to take the lead on providing economic stability. As part of this measure, local governments have been asked to adopt more flexible policies for homebuyers under the ‘one city one policy’ mandate. For example, deposit requirements were reduced and residency obligations were loosened in an effort to stimulate demand.6
4.Property Sector Funding
During August, the property sector benefited from two funding channels. The first from state owned entity China Bond Insurance Company, which regulators asked to guarantee onshore bond issuance for several private property developers.7 The second was an RMB200bn special loan facility for distressed property developers to ensure the completion of stalled building developments, specifically semi-completed housing projects.8
State-Owned vs. Privately-Owned Property Developers Recover from April Lows
Source: JP Morgan, China Property Report, 31st August 2022. Chart shows major developers’ contracted sales y/y growth by type. For illustrative purposes only.
Market participants clearly welcomed this unprecedented level of policy stimulus. Credit markets reacted favourably to the news and began to more accurately reflect underlying fundamentals.
Looking ahead, we believe the longer-term outlook for Asia remains positive. Unlike its Western counterparts, Asia is currently not experiencing any issues with inflation. Growth is also expected to pick up during the second half of the year, as we expect Chinese growth to normalise in 2023 to c. 5%. However, risks remain; our biggest concern is the country’s zero-Covid policy which could counteract any economic recovery. Nevertheless, while we continue to believe Asia credit offers a compelling investment opportunity, in our view it is very important to remain focused on bottom-up fundamental analysis prior to making any investment decisions.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of September 2022 and may change without notice.
Sources:
- ICE Platform, 31st August 2022 - ICE BofA Asia Dollar High Yield Corporate Index (ACHY)
- ICE Platorm, as of 31st August 2022 China carve out of the ICE BofA Asia Dollar High Yield Corporate Index (ACHY)
- ICE Platform, 31st August 2022 - ICE BofA US High Yield Cash Pay Index (J0A0)
- ICE Platform, 31st August 2022 - ICE BofA Euro Corporates Index (ER00)
- Bloomberg, 22nd August 2022
- CNBC, 17th August 2022
- Reuters, 16th August 2022
- Business Standard, 22nd August 2022
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About the Author
Tracy Zhao, M.Ec.
Senior Credit Analyst, Emerging Markets - Asia
Tracy joined Muzinich in 2016. Prior to joining Muzinich, Tracy spent 2 years at Aozora Asia Pacific Finance focusing on Syndication Loans across a range of sectors in the Greater China region. Previously, she was an Equity Analyst with a private fund. Tracy earned a Bachelor’s Degree in Economics from Shanghai Jiaotong University and a M.Ec. from the University of Hong Kong.
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Index Descriptions
ACHY – The ICE BofA Asian Dollar High Yield Corporate Index tracks the performance of sub-investment grade US dollar-denominated securities issued by Asian corporate issuers in the US domestic and eurobond markets.
J0A0 - The ICE BofA ML US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.
ER00 – The ICE BofA ML Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.
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