China corporate debt: Questionable investment
Policymaking is being tightened aggressively to avoid inflating a credit bubble in China, leading some analysts to argue that investors should act with caution when investing in its corporate debt.
"When policy is tightened, it becomes harder for companies to fund themselves on the margin," says Viktor Hjort, head of Asia fixed-income research and head of global corporate credit strategy at Morgan Stanley. "Because credit is being rationed, corporate bonds don’t perform as well."
The tightening of policies seems to have contradictory effects: on the one hand, it could avoid a hard landing, which might be good for investment in the long run, but in the short term, this is painful for corporates. As a result, it is reasonable to be cautious on Chinese corporate debt, even if one doesn’t think there will be a hard landing.
Hjort believes that pre-emptive policy tightening initiated by the government means that "China is not facing a hard landing". However, he adds, as Chinese property bonds are trading low, two opposing conclusions can be drawn. "[First], we can take the Jim Chanos view and conclude that China is in the midst of a property bubble, similar to what happened in the US in 2008." In this respect, there is no looking back for China. The second is to consider China as the US was in 2004, before the crisis. "China is at the point where it realizes it’s playing with fire," says Hjort. "Now they are trying to prevent this fire from burning too much."
So, within China’s bear economy, either a hard landing has started, or the short-term bad figures are a result of pre-emptive tightening policies. "This means the beginning of the end of double digit growth in China, or simply a temporary setback for the market," says Hjort. "I’m under the impression it’s just a temporary setback."