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BNP Paribas cautions on China onshore bonds

China’s onshore corporate bonds are likely to see surge in defaults, according to BNP Paribas Asset Management.

“In terms of onshore Chinese debt, we expect some additional spread widening, which means more defaults,” Jean Charles Sambor, deputy head for emerging market fixed income at the French asset manager, told sister publication Fund Selector Asia.

It follows ratings agency Fitch’s recent warning about a rise in RMB bond defaults in 2019. The number of Chinese corporate defaults by issuer count and principal amount is likely to hit new highs this year, the rating agency wrote in May.

The credit ratings agency expects 2019 defaults to hit a record high by issuer count and principal amount. Last year, 45 individual bonds with a value of RMB110.5 billion ($14.1bn) defaulted on their offshore or domestic issues, according the Fitch report published this week.

Twenty-two companies defaulted on 47 onshore bonds worth RMB31bn in the first four months of this year, while other issuers claim to have repaid bonds directly to bondholders instead of through clearing houses since March, which allowed them to hide late payments from publicity, according to Fitch.

The Chinese bond market has taken a significant step towards integrating with the global financial system with the phased inclusion of Chinese government bonds and policy bank securities in the Bloomberg Barclays Global Aggregate that began in April.

A market rebalance

Sambor added that in some respects the rise in defaults would be a positive development. “It is good that policymakers are allowing more defaults because for years they have been preventing this, which is not good for a price discovery mechanism,” he said.

Last year, China onshore bond defaults reached a record high of around RMB 84.3bn (€11bn), driven by companies’ poor liquidity, according to a Moody’s report.

“Risk aversion [among investors], combined with higher funding costs and limited access to alternative funding channels makes it challenging for weaker companies to refinance,” Nino Sui, a senior analyst at Moody’s, wrote in the report.

Cheap offshore high yield

Sambor was more optimistic about China offshore high yield bonds which he said offer the same credit risk as US high yield, but with better valuations. “China high yield is very cheap compared to US and even global high yield,” he said.

Sambor said he particularly liked the offshore high yield bonds of property developers because the sector is expected to be resilient against the trade tensions between the US and China.

“If you expect trade tensions to increase, policymakers in China will be more accommodative to make sure that domestic demand for property in China to continue to do well. Of course, that means we are cautious of the export sector,” he said.

Other fund managers have also warmed to Chinese property issuers, including Insight Investment and Allianz Global Investors.

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Francis Nikolai Acosta

Francis is editor for Fund Selector Asia, covering the asset and wealth management industry in Asia. He joined Last Word Media in November 2016. Previously, he was a reporter at Ignites Asia, A Financial...

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