Following a strong recovery from the pandemic, China is facing powerful headwinds of tepid consumer demand, supply chain disruptions, and uncertain external economic conditions. Longer term, issues such as an ageing population, decarbonization and the prospect of policy tightening in advanced economies will all have an impact on China’s growth trajectory. Regulatory reforms in several industries, renewed domestic Covid-19 outbreaks and debt woes in the real estate sector are also adding to market concerns.
On the other hand, China’s linkage with global markets is deepening. Foreign inflows into the domestic bond market remain healthy – foreign holding of Chinese government bonds (CGB) reached US$397 billion at the end of January 2022, according to the data released by the People’s Bank of China (PBoC). With this representing an allocation of 4.2% in what is the world’s second largest bond market, there is considerable potential upside when compared with around 30% of US treasuries held by foreign institutions.
In line with the greater focus on sustainability, China is blending its growth strategy to embed environmental protection as a core element as the country works its way towards peaking carbon emission by 2030. The transition won’t be easy. New clean infrastructure and sustainability-related investments would be required. With the PBoC and the European Commission coming together to produce the Common Ground Taxonomy, Climate Change Mitigation Instruction report, the promise of harmonized green definition could set the stage for green investors to enter the China market.
The coming 12 months, therefore, will be about managing plenty of challenges but also capturing a surfeit of opportunities. The onshore bond market will capture investors’ attention especially as the government is front-loading issuances to stimulate economic activity. Meanwhile, the offshore bond market will likely continue to be under the shadow of the blow-up in the high-yield property bond market during the second half of last year.
The Asset Events+ is pleased to be hosting the annual Asia Bond Markets Summit, China. Now in its second decade, the Asia Bond Markets Summit is the region’s preeminent fixed-income conference, bringing together issuers, investors, policymakers and other stakeholders involved in Asia’s bond markets.
As the dust settles following the implosion of Chinese real estate credits in the G3 bond market, investors will be watching and waiting how defaults are resolved and when is the best time to re-enter the market. Corporate bond issuance level contracted by 12% in 2021 largely on the back of the meltdown in the high-yield bond market led by real estate developers. The contagion spread into industrial names as bond defaults nearly doubled to just a shade below US$14 billion from a year ago. Just as in the past five years, offshore investors will be watching closely the resolution of these junk credits. Overall default rates, both onshore and offshore, remain manageable on a risk-adjusted basis. But caution is the watchword for investors even as opportunities could present themselves as the year progresses.