China has dealt with its much-publicised credit problem but investors may not be prepared for further fallout, BlueBay’s Polina Kurdyavko has warned.
‘In its previous attempts to manage the dual task of credit tightening and reaching growth targets, the government has applied the brakes and accelerator technique, which reduced the effectiveness of the measures - this time it's different,’ she told Citywire Selector.
Citywire + rated Kurdyavko, who runs several funds at BlueBay, including the BlueBay Emerging Markets Corporate Bond fund, has been increasing credit exposure in China across strategies.
She said this was due to interesting opportunities in the region, as well as Chinese officials agreeing bond investors need more stability.
'Several Chinese officials told me that financial safety is a matter of national security, while investors should target lower 'better quality' growth,' she said.
'In the long term, the transition from 'Made in China' to 'Trade in China' will be one of the most exciting developments in our industry. China should eventually open its $10 trillion bond market - the third largest market in the world - to international bond investors.’
With local corporate bond issuances down 73% year on year from 1.6 trillion Chinese yuan in the first six months of 2016 to 436 billion Chinese yuan in the first six months of 2017, Kurdyavko said tight monetary policy since the beginning of the year has resulted in a meaningful slowdown on RMB onshore bond issuance.
'The NDRC (National Development and Reform Commission) has introduced new restrictions on external borrowing by property developers, prohibiting them from raising external funding on Eurobonds or loans longer than one year.
'There is a consistent message of a slowdown, from steel companies to real estate developers and foreign players. These companies experienced weakness in May, and expect a further slowdown into June/July.'
Kurdyavko said the real estate sector has seen subdued volume growth with new construction plans starting this year.
'Most of the year-to-date growth for top tier developers came from property price appreciation. The regulator has restricted access to funding by real estate developers and is planning to introduce a property tax on the local government level to curb further price appreciation.'
Despite this Kurdyavko said China has a history of only opening strong parts of its economy to foreign players, creating a bumpy road, rather than a smooth transition for the country.
‘It feels like the odds are in favour of contrarian positioning. Non-consensus thinking and forensic risk management is key to investing in China.While acknowledging abundant liquidity, we prefer to stay in high-quality investment grade credit.
'We would consider further increasing this exposure to reflect supportive technicals. However, we think fundamental risks in the high yield segment are underpriced. If China is successful on its credit tightening path, we would expect to see more credit defaults.’
Over the three years to the end of June 2017, the BlueBay Emerging Markets Corporate Bond fund returned 8.33% in US dollar terms. This compares with a 10.49% rise by its Citywire-assigned benchmark the BofA Merrill Lynch EM Corporate Plus TR, over the same time period.