• HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT
Tamim Asset Management
  • HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT

Market Insights

Chinese Bonds Following the Trail Blazed by Equities

14/8/2018

0 Comments

 
Kevin Smith, Lead Portfolio Manager for the exciting new Asia Small Companies strategy, takes a look at the Chinese bond market. He suggests that perhaps the media concern about rising defaults isn't cause  for as much panic as they might suggest.
Bond Connect BannerSource: ChinaBondConnect.com
We recently wrote about our experiences of investing in equities in China over the past 25 years (see here).  Bond markets in China are now following a similar path of being made available to international investors.  The Bond Connect programme celebrated a first anniversary in July 2018 with some impressive transaction flows achieved during that year, however, caution is required when looking at the bond market in China, but not the caution that is typically expressed by headlines in the media which tend to focus on rising defaults.  We view the recognition of defaults as a positive development, unsound companies should be allowed to default, the default rate in China is too low to be believed, so we view the recent rise as a sign of progress not crisis.  Investing in Chinese bonds today has parallels with investing in China B-shares 25 years ago, it is a step into the unknown and there will be some lessons to be learned.

Unlike the equities counterpart, Bond Connect offers only a “Northbound” component to the programme, international investors looking to direct investments into China, there is no “Southbound” route for domestic Chinese investors to access international bond markets. The introduction of Bond Connect was taken by some global investment managers as an opportunity to sell the idea of investing in Chinese bonds based around two elements, market size and a yield premium versus many other markets in the world.  At the end of June 2018, the total amount invested via the Bond Connect programme was equivalent to USD 224 billion, an increase of international participation in the market by 75% since the scheme commenced in July 2017.  International investors now hold 2% of the domestic corporate bond market in China.

The number of companies defaulting on their bond repayments is increasing, 13 companies (4 listed) in the first half of this year versus 18 (1 listed) in all of 2017.  This increase is to be expected in direct response to steps taken to tighten credit conditions in the economy and an increased acceptance of defaults by the authorities.  The acceptance of defaults is a step in the right direction and marks a significant change from the historic policy of implicit guarantees applied to all debt securities.  We particularly like the fact that listed companies are being permitted to default.  Debt defaults were allowed to occur for the first time in 2014, so that aspect of the market is still very immature.  The net result of allowing defaults will be improved capital allocation and efficiency however, the transition will be a sometimes-painful learning process for the market participants just as it was in the equity market 25 years ago. Domestic credit ratings need to adjust to a market that allows defaults.  According to domestic ratings agencies nearly 30% of the Chinese corporate bond market is graded triple-A versus 2.2% for bonds rated triple-A in the United States.  The ratings illusion needs to be appreciated as a key element for any international investor participating in the corporate bond market in China.  The majority of corporate bonds in China are speculative rather than investment grade paper and that should be reflected in the ratings being awarded in the domestic market. That adjustment process to realistic bond ratings will be slow.

While bond defaults are now accepted in China, the default rate is less than 0.1% versus the global average of 2.4% in 2017.  In the next few decades we should expect to see the default rate rise in line with international norms.  With the equivalent of USD 1.3 trillion of bonds due for repayment in the next twelve months, you can expect to see another step up in the default rate especially as the short-term fix of financing via the shadow banking sector has been (correctly) stamped out by the authorities.  The next time you see a headline in the media expressing concern about rising defaults in the Chinese bond market, try to react positively remembering this is a sign of progress.

0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    Markets & Commentary

    At TAMIM we are committed to educating investors on how best to manage their retirement futures.

    Sign up to receive our weekly newsletter:

    * indicates required

    TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.

    Archives

    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    July 2016
    June 2016
    March 2016
    February 2016
    January 2016
    December 2015

    Categories

    All
    Accounting
    AGM
    Amazon
    APRA
    Asia Small Cap
    Asset Allocation
    Aus Equity All Cap Value Portfolio
    Aus Equity Income Portfolio
    Aus Equity Small Cap Portfolio
    Australian Banks
    Australian Market Commentary
    Banking Royal Commission
    Big 4 Banks
    BNPL
    Brexit
    Budget
    China
    Corporate Governance
    Correlation
    Cryptocurrency
    Currency
    Darren Katz
    Dividend Yields
    Election
    Emerging Markets
    Energy
    GDP
    Global Equity High Conviction Portfolio
    Global Mobility
    Gold
    Guy-carson
    Housing
    Income Investing
    Inflation
    Infrastructure
    Insurance
    Interest Rates
    International Commentary
    Investment Thematics
    Investor Psychology
    Israel
    Japan
    Katz's Corner
    Kevin Smith
    Market Outlook
    Mergers-aquisitions
    Mobility
    Oil
    Passive-vs-active
    Peer-to-peer-lending
    Peertopeer-lending
    Portfolio Management
    Portfolio-management
    Private Debt
    Property
    Rando's Reflections
    RBA
    Recession
    REITs
    Reporting Season
    Retail
    Risk Management
    Robert Swift
    Ron Shamgar
    Small Cap Income Portfolio
    Small Caps
    Succesion Planning
    Telecoms
    The Pain Report
    Trade War
    Trump
    Value Investing
    Video
    ZIRP

    RSS Feed

TAMIM | Equities | Property | Credit
​

TAMIM Fund
Australia All Cap
Australia Small Cap Income
Global Mobility
Global High Conviction
Credit

Listed Property
TAMIM Property
Company
About
Contact
Insights
Invest Online
Login
Other
Privacy Policy
Terms & 
Conditions
​Disclaimer
Contact
Level 4, 55 Grafton Street
Bondi Junction, Sydney NSW, 2022

1300 750 007

ima@tamim.com.au

DISCLAIMER

​The information provided on this website should not be considered financial or investment advice and is general information intended only for wholesale clients ( as defined in the Corporations Act). If you are not a wholesale client, you should exit the website. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions. Where the website refers to a particular financial product, you should obtain a copy of the relevant product services guide or offer document for wholesale investors before making any decision in relation to the product. Investment returns are not guaranteed as all investments carry some risk. The value of an investment may rise or fall with the changes in the market. Past performance is no guarantee of future performance. This statement relates to any claims made regarding past performance of any Tamim (or associated companies) products. Tamim does not guarantee the accuracy of any information in this website, including information provided by third parties. Information can change without notice and Tamim will endeavour to update this website as soon as practicable after changes. Tamim Funds Management Pty Limited and CTSP Funds Management Pty Ltd trading as Tamim Asset Management and its related entities do not accept responsibility for any inaccuracy or any actions taken in reliance upon this advice. All information provided on this website is correct at the time of writing and is subject to change due to changes in legislation. Please contact Tamim if you wish to confirm the currency of any information on the website.  

magellen, kosec, clime, wilson, wam, montgomery, platinum, commsec, caledonia, pengana, tamim

  • HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT