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Monday, June 20, 2016, 15:45

Chinese bond market remains on analysts’ radar

By Duan Ting

HONG KONG - Despite the spate of defaults in China’s bond market, analysts have not lost faith in the sector. “We favor China’s bond market more than the equity market at the current stage,” Fielding Chan, Asia economist at Bloomberg LP, told China Daily.

Chan pointed out that the default risk in China is still low compared to other countries and the investor structure is stable as most are State-owned commercial banks.

Chan believes that the downturn in the Chinese economy and the government’s efforts to keep the interbank market stable are good for the bond market. The finance function of bonds is better than that for equity as the information is relatively transparent, he added.

According to Bloomberg, at least 11 firms have missed onshore bond payments this year and issuance is faltering as investors realize the government will no longer bail out every struggling company.

"Chinese corporate bonds defaults do not present a systemic risk but downgrades and defaults will likely continue,” Amanda Stitt, investment director at Legg Mason Global Asset Management, told a media briefing earlier in June.

She said that the Chinese government has done much to support the nation's corporations, but this is not sustainable and there will be market corrections. However, the government may not step in to prop up the companies this time and Legg Mason is waiting for the right time to invest in the Chinese market, she added.

From the perspective of the investor, Stitt prefers offshore renminbi bonds and dollar-denominated bonds, and she sees opportunities to invest in onshore China corporate bonds in the coming 12 months.

Huang Laiping, director at Amicus Asset Management, said the bond market is a preferred investment destination during an economic downturn but investors should be cautious about the company’s financial and operational situation when investing in corporate bonds.

The mainland bond market, worth approximately 48 trillion yuan ($7.3 trillion), is the third-largest in the world, behind the United States and Japan. The interbank market comprises more than 95 percent of total trading volume.

The People’s Bank of China in February officially announced the full opening up of the interbank bond market to eligible offshore institutional investors. Most types of overseas financial institutions will no longer require prior approval or quotas to invest in China’s 35 trillion yuan ($5.4 trillion) interbank bond market. The detailed rules were released on May 27.

"Since China has opened up its onshore market, there are now more opportunities for investment in the mainland,” said Stitt, while however warning that there has been much mispricing and, therefore, investment in Chinese domestic corporate bonds right now is still a bit "dangerous".

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