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Where's the value in China?

Chinese bonds have no relative value. Its equity market is convoluted and stagnant. So why all the hype and hysteria? Theodore J Kim reports.

Threat from the west 

Chinese alphabet soup

CHINESE SOVEREIGN DEBT’S arrival at a lofty A1 credit rating with a paltry spread to US treasuries of roughly 50 basis points is a shining example of the bullish frenzy among global investors for all things emanating from the People’s Republic.

Whether looking at systemic risk, inflation, GDP growth, or the trade surplus, the fundamentals underpinning the fixed income market – and to a large extent the nascent private-equity business – propel China to the top of the “hot markets for the 21st century” league tables.

An investor willing to take on risk in the search for yield will find far juicier pickings – albeit with more potential for downside volatility – in the US corporate bond market. In short, Chinese sovereign debt, according to market prices, is actually safer than US corporates.

In stark contrast, though, one need only look at the local equity exchanges in Schenzen and Shanghai to find a massive stagnant swamp of uninvestable companies, corrupt and opaque corporate governance, fictitious accounting numbers and a layer of Soviet-style regulatory restrictions. While fixed-income markets hover near an all-time high, Chinese domestic equities have recently fallen close to an eight-year low.

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