Debt defaults would do China good and further cement its spot as the best bond market to be invested in at present, UBS Asset Management’s head of Asia Pacific fixed income has said.
Speaking to Citywire Selector, Hayden Briscoe said the Chinese debt market is maturing and moving beyond a situation in which state sponsorship has been keeping unviable issuers afloat.
Briscoe, who joined UBS AM from AllianceBernstein in 2016, said the ability to allow companies to collapse is a sign that the country's financing models are improving.
‘Towards the end of 2017 and into early 2018 there were changes in the banks around entrusted loans. I think that will produce more downwards pressure on credit-dependent companies, so we are expecting more defaults to come through. Which, in a bid to improve the market, I think is a positive.’
Briscoe also said that other regions of China are starting to show different signs of strength and credit investments are becoming a more nuanced call than purely buying Chinese growth through any and all local government debt investments.
‘Credit differentiation is starting to happen now because we are getting more differentiation between the regional provinces. The challenge is that there is no real secondary market for credit at the moment. At the start of 2017 there was a lot of focus on the role of asset managers, wealth managers and so-called shadow banking and what role they played in credit generation.’
Ultimately, Briscoe said the Chinese market is in a healthy position, given its top-level growth and internationalisation efforts. He added that multi-asset investors with healthy emerging market debt allocations would be best served allocating here.
‘I would argue that Chinese debt is the best bond market to be invested in today. Coming into 2018, we were expecting some challenges and we appreciate some investors may be sceptical, but we have seen this is a market with high yield. It is liquid and the quality of credit is improving.
‘If you are looking for a diversifying and yielding return in your multi-asset portfolios then this is an excellent place for investors to pivot towards,’ he added.