Five views on Moody’s downgrade of China

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Arthur Lau, Pinebridge Investments‘ co-head of emerging market fixed income and head of Asia fixed income, thinks that other credit rating agencies, such as S&P, might follow suit.

“The move by Moody’s to reduce the rating was not a shock given it had already downgraded its outlook from neutral to negative in March. The timing of the rating reduction has taken the market by surprise.”

“Chinese credit has opened wider and we believe that it may underperform in near term as the onshore tightening process has only just begun. For the offshore bond market, we do not think there will be many changes, partly due to the expected supply of lower credit quality sectors.”

He also said he expected some technical support for sectors such as high yield bonds and LGFVs amid lower supply.

“We do not think the yield-chasing mentality will change in near term. It is more attractive for investors who are able to buy on the dip for now, as expected supply from non-China sectors/areas and lower credit quality Chinese names is low.”

As for the Bond Connect, he said he thought the impact would be limited. “We do not think the downgrade will significantly impact the Bond Connect fundamentally. Bond Connect investors will likely look at the dynamics of FX, rates and credits,” he commented.

“Given the declining credit cycle onshore, we believe investors will likely focus more on FX and rates. Hence, they will invest mainly in government bonds and policy bank sectors.”

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