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Chinese defaults: Five things you need to know

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. 

  1. 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.
  2. 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.
  3. 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. 
  4. Despite the government’s best intentions, investors remain susceptible to unfriendly headlines because the corporate credit market is still maturing in China.
  5. 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.

 

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