Posted inAsset managers

Mispriced credit opportunities in China

Lombard Odier has turned positive on China fixed income in anticipation of policy loosening.
Jean-Louis Nakamura, Lombard Odier

China bonds hit new lows in 2021, as Beijing’s crackdown on tech giants and property developers dampened investor sentiment.

However, Lombard Odier believes this should not deter allocating assets to China in 2022.

“Policy support will increase in the first few months of this year, which will prop up the China onshore market. Meanwhile, the offshore bonds of Chinese companies are undervalued,” said Jean-Louis Nakamura, CIO of Lombard Odier Asia-Pacific.

“We believe 2022 will be a better year for Chinese credits even though it may take some months before the market stabilises.”

In terms of policy easing, Nakamura believes the Chinese government may allow more flexibility in the usage of escrow accounts, where property developers now have to place money they receive upfront from the sale of apartments.

“By reversing some of the strictest rules which led to the situation today, it would restore some of the confidence in both investors and home-buyers to improve the liquidity of developers,” Nakamura said.

If the policy relaxation takes place as expected, Nakamura believes the credit market will recover progressively with BB credits bouncing back before lower-credit rating single-B names.

Positive sentiment returning

Other investment managers agree that Chinese credit is the sector to generate returns. For example, Haitong International told a media briefing that the worst is over for Chinese bonds and market sentiment will improve.

“We believe the current price and yields, especially of real estate high-yield bonds, have taken into account most of the negative factors including the broader slowdown of China’s real estate sector, major defaults and refinancing risks,” said Hyde Chen, head of investment strategy of asset management, managing director at Haitong International.

Fidelity’s Alvin Cheng also recommended investors to allocate their assets to China bonds, as they are less correlated to other asset classes and provide a strong defensive play.”

Part of the Mark Allen Group.