Following a default ramp up in 2018, what do EM debt investors need to know about Chinese defaults in 2019? We’ve got the market facts.
- While defaults have been rising, this is an expected consequence of deleveraging policy, with the total number representing just 0.7% of the entire Chinese corporate bond universe in 2018.
- The tightening of liquidity conditions disproportionately affected the private sector, with SME the hardest hit; the government has realised this unintended consequence and is actively tweaking policy.
- When rising defaults are a logical consequence of a policy move they need not be feared – defaults are the agents of creative destruction that are needed to keep the credit markets honest and healthy.
- Despite the government’s best intentions, investors remain susceptible to unfriendly headlines because the corporate credit market is still maturing in China.
- We can expect dispersion and volatility to increase – this should give rise to dislocations and price action that create opportunities for alpha generation in both the hard and local currency universe.