Defusing China Debt Bubble: A clean-up that offers credit investing opportunities

  • 24 Apr 2018

    China’s President Xi Jinping recently urged local governments and companies to speed up efforts to reduce debt as part of his “critical battles” against financial risk. China is pushing the campaign to shift its economy away from debt-fuelled expansion towards higher-quality output, cracking down on shadow banking and corporate lending. Fidelity sees this clean-up in the Chinese financial market as new opportunities that support credit investing.

    The ballooning debt bubble

    The extraordinary fiscal stimulus and monetary easing after the global financial crisis took China’s debt levels to an unprecedented level at around 270% of GDP. With decreasing marginal gain, credit expansion has also led to pressure on asset qualities of banks and other financial institutions.

    China’s leverage started swelling after the Global Financial Crisis

    Source: Bloomberg, data as of 31 March 2018

    However, there are some key differences between the financial systems of China and most developed economies.

    • High savings rate combined with a tendency to leave cash with banks means that liquidity in China is typically readily available.
    • In stark contract with Western economies, virtually all Chinese debt is domestically financed and provided by local banks.
    • Capital controls in China are still in place and, as shown in recent years, can be rapidly tightened if needed.

    Credit opportunities amid deleveraging

    In the face of mounting debt level, Bryan Collins, head of Asian Fixed Income and portfolio manager at Fidelity believes that prudent deleveraging in China over the medium term will support credit spreads and government bond yields as growth moderates further.

    Market participants are reassessing risks associated with individual companies, prompting credit differentiation to take place. Hence, we think bottom-up credit selection will be increasingly important when investing in the China bond market, especially for credit-focused strategy such as China High Yield.

    Why Fidelity?

    Fidelity is a leader in Chinese bond market. As an international fund house with a full-fledged fixed income team based in Hong Kong and Shanghai, connected research insights across fixed income and equity and a focus on superior risk adjusted returns, Fidelity can help you discover the potential of the China bond market.