China Translated – March 2020

As coronavirus becomes a global challenge, investors are looking for a policy response. Looking at what's happening on-the-ground in China, we can see the Chinese government has been a first-mover, and that has major implications for both the Chinese economy and high-yield fixed income investors.

The People's Bank of China, China's central bank, put RMB 1.2trn (USD120bn) into money markets on February 3^rd – the biggest daily move on record – and added another RMB 400bn (USD 57.5bn) on February 4^th. On top of this, China's central bank also cut rates for commercial banks, companies, and households through February.

Moving into March, China's government also opened funding channels so credit
gets into the economy, and quickly.

Here are four measures:

1. Supporting local government financing vehicles (LGFVs): local governments manage LGFVS, which invest in local-level projects, like infrastructure and property development. LGFVs faced big repayments in 2020 and 2021, so the government has allowed them to extend repayments and issue new debt before the end of March.
2. Allowing shadow banking channels to open: China's regulators have allowed shadow banking channels, like trust financing companies, back into operation to boost lending.
3. Easing controls on property developers: by removing caps and relaxing the 1-year minimum tenors on bond issues, particularly for Chinese developers domiciled in Hong Kong.
4. Assisting small businesses: small- and medium-sized businesses can now delay loan payments until July and have can use RMB 500bn (USD 71.9bn) of new financing facilities.

China's economy still faces many challenges and we expect weak official  statistics for 1Q20.

However, we believe the government moves described above indicate a big reduction in default risks in China, and potentially for the next twelve months.

That's different to the rest of the world right now, where the initial economic effects of the coronavirus outbreak are starting to be felt and where default risks appear to be rising.

So for investors struggling in a world of not just low yields but also a huge USD 14trn of negative yielding debt, we feel that the Asian high yield market currently looks attractive.

We believe the strong relative value on offer compared to US and European high yield, make for an attractive solution for yield-and-income hungry investors right now.