Chinese real estate: systemic risk or specific opportunities for credit investors?
Alan Siow discusses recent volatility in China’s property sector and its implications for investors in the country’s credit market.
Jan 11, 2022
EM fixed income markets posted gains for December. While the US Federal Reserve turned notably more hawkish, market sentiment improved following the risk-off shift seen in November amid mounting evidence that the Omicron variant is milder than earlier COVID-19 variants.
The IMF approved the final disbursement under Angola’s extended fund facility program and reached a staff-level agreement with Zambia for an Extended Credit Facility. Egypt’s remittances and Suez Canal revenues remained strong, and it has secured a US$3 billion syndicated loan, which will be directed towards ESG projects.
Manufacturing in the region remains strong, with most countries running trade surpluses. Malaysia, Singapore and South Korea are seeing inflation rise due to tighter labour markets and higher transport costs. The fourth quarter statement from the People’s Bank of China (PBoC) sounded more dovish, with the PBoC acknowledging headwinds to growth and cutting the Reserve Requirement Ratio.
Inflation is still surprising on upside for most of the region and central banks continued to be proactive in response to this. Chile’s presidential election result saw left-wing Gabriel Boric winning with relative ease (gaining 56% of the votes). While his proposal to end the private pension scheme is a slight concern, we believe it is unlikely to get through congress.
Central and Eastern Europe
Monetary policymakers in Hungary, Romania and the Czech Republic raised interest rates, as inflation continues to rise across the region. In Poland, activity data in December, including industrial production and retail sales, exceeded expectations, while inflation pressures increased further.
Rest of Europe, Middle East and Africa (EMEA)
The Turkish central bank cut interest rates again, despite soaring inflation. Given acute weakness in the lira, authorities announced a new FX-linked bank account to entice back locals. Elsewhere, Russia and Ukraine both raised interest rates, while tensions between the countries continued.
EM corporate debt highlights
The EM corporate debt market posted modest gains in December (+0.4%), halting the slide of the fourth quarter to finish the quarter down 0.6%. Volatility relating to regulatory tightening in China’s real estate sector intensified, pushing spreads to their widest levels in a decade. Despite this, the overall market has been remarkably resilient (up 0.9% in 2021), thanks to its geographic and sectoral diversity.
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