Strategy

China’s Policy U-turn Sharpens Focus On High-Quality Credits

Amanda Cheesley Deputy Editor 18 January 2023

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PineBridge Investments has published its insights on credit opportunities in China, as the country rapidly ends it Covid controls.

Pinebridge Investments, which at the end of September looked after $133.4 billion, thinks that bond investors can finally eye high-quality credits as a route to reliable and diversified income without excess volatility, with certain sectors in China set to benefit from the domestic economic upswing.

In the final two months of 2022, China’s policymakers loosened strict pandemic controls and bailed out the real estate sector with more money than had been expected.These changes, coupled with ongoing supportive monetary and fiscal measures, have encouraged Pinebridge to think Chinese credit assets are worth holding.

Credit spreads have tightened in recent weeks and Chinese risk assets have regained ground. Pinebridge said in a note that underlying market conditions justify the moves.

In the near term, the waves of infections in different regions of the country will hit consumer sentiment and disrupt supply chains, the firm said. This risk is particularly high in the first two months of the year as the Chinese New Year holiday ushers in the world’s largest annual human migration. The firm expects soft economic data and corporate earnings in the last quarter of 2022 and the first quarter of 2023.

“However, looking beyond this disruptive and bumpy reopening period, it expects economic activities to gradually recover from the latter part of the second quarter onward, on the back of pent-up demand. Specifically, Chinese households have accumulated decent excess savings during the pandemic years,” the firm said.

“While the Covid policy pivot provides upside momentum for growth from the second half of 2023 on, the turnabout in property sector policy reduces a significant downside tail risk for the economy,” it continued.

It is forecasting an L-shaped trajectory for property sales, as it interprets the policy objective as intended to stabilise the market rather than to engineer a sharp recovery, as in the previous cycle. 

Annual national residential property sales could be 30 to 40 per cent lower than the peak level going forward, the firm continued. Nonetheless, this is a more than $1.5 trillion market in terms of annual sales, and high-quality developers should still play a role, albeit in much smaller numbers than before.

Pinebridge said it is optimistic about a reopening-driven growth rebound in China from the second half of 2023 and into 2024. However, it said there are uncertainties associated with the country’s long-term growth trajectory amid unfavourable demographic trends, potential increases in state control, and ongoing US-China tensions.

That being said, it views policymakers’ major long-term objectives – of reducing systemic risk, enhancing the quality of economic growth, and maintaining social stability – as credit positive.

These shifts have already been reflected in several key policy campaigns in recent years, the firm added. After short-term drags on growth when these initiatives were first introduced, the upshot from a credit perspective is that China is now generally better positioned than it was a few years ago, especially among the higher-quality credits.

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