China Translated – March 2020

China Translated explains what's happening in China both on the ground and in the markets.

by Hayden Briscoe, Head of Asia Pacific Fixed Income 11 mar 2020

As coronavirus becomes a global challenge, investors are looking for a policy response. Looking at what's happening on-the-ground in China, we can see the Chinese government has been a first-mover, and that has major implications for both the Chinese economy and high-yield fixed income investors.

Key takeaways:

  • China's government has been a first mover and unleashed a wave of policy support measures in February and March;
  • Funding channels have been opened so credit gets into the economy, and quickly;
  • Default risks have subsided in China, just as they have risen elsewhere around the world;
  • China and Asian high yield bonds offer an attractive option to investors in a world starved of yield.

China rapidly loosened policy in February

The People's Bank of China, China's central bank, put RMB 1.2trn (USD120bn) into money markets on February 3rd – the biggest daily move on record – and added another RMB 400bn (USD 57.5bn) on February 4th. On top of this, China's central bank also cut rates for commercial banks, companies, and households through February.

Further support followed in March

Moving into March, China's government also opened funding channels so credit
gets into the economy, and quickly.

China's government also opened funding channels so credit gets into the economy, and quickly.

Here are four measures:

  1. Supporting local government financing vehicles (LGFVs): local governments manage LGFVS, which invest in local-level projects, like infrastructure and property development. LGFVs faced big repayments in 2020 and 2021, so the government has allowed them to extend repayments and issue new debt before the end of March.
  2. Allowing shadow banking channels to open: China's regulators have allowed shadow banking channels, like trust financing companies, back into operation to boost lending.
  3. Easing controls on property developers: by removing caps and relaxing the 1-year minimum tenors on bond issues, particularly for Chinese developers domiciled in Hong Kong.
  4. Assisting small businesses: small- and medium-sized businesses can now delay loan payments until July and have can use RMB 500bn (USD 71.9bn) of new financing facilities.

As global risks have gone up, default risk in China has subsided

China's economy still faces many challenges and we expect weak official  statistics for 1Q20.

However, we believe the government moves described above indicate a big reduction in default risks in China, and potentially for the next twelve months.

That's different to the rest of the world right now, where the initial economic effects of the coronavirus outbreak are starting to be felt and where default risks appear to be rising.

Where to find yield & income in a world of negative yields?

So for investors struggling in a world of not just low yields but also a huge USD 14trn of negative yielding debt, we feel that the Asian high yield market currently looks attractive.

We believe the strong relative value on offer compared to US and European high yield, make for an attractive solution for yield-and-income hungry investors right now.

For investors struggling in a world of not just low yields but also a huge USD 14trn of negative yielding debt, we feel that the Asian high yield market currently looks attractive.

High Yield Markets Compared (YTW): Asia, US and Europe, Mar 6, 2019-Mar 6, 2020

Source: Bloomberg, Mar 9, 2020

Key investor takeaways:

  • China's government has been a first mover and unleashed a wave of policy support measures in February and March;
  • Funding channels have been opened so credit gets into the economy, and quickly;
  • Default risks have subsided in China, just as they have risen elsewhere around the world;
  • China and Asian high yield bonds offer an attractive option to investors in a world starved of yield.

Read more

Fixed Income

A globally oriented service for a globally integrated world

Asset Management services and solutions in your location

Please select your region

For further information on what we can offer you, please get in touch.

Important legal information

To proceed, please confirm that you are a professional / qualified / institutional client and investor.

Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss. 
© UBS 2020 The key symbol and UBS are among the registered and unregistered trademarks of UBS.

Reset