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.
It was a volatile start to the year for bond markets, with rising government bond yields, particularly in the US, the dominant driver. The JP Morgan GBI-EM was flat (local bond price falls offset gains from EM FX strengthening against the US dollar). Reflecting hard currency bonds’ relatively higher sensitivity to US rates, the JP Morgan EMBI fell 2.8% and the JP Morgan CEMBI ended the month down 1.7%.
Egypt continued on its positive fiscal path, recording a primary surplus for the 2021/22 financial year. In Zambia, the foreign trade surplus continued to be well supported, with both copper and other exports performing well. Elsewhere, Angola’s rating was upgraded to B- by Fitch.
Various central banks in the region turned slightly more hawkish, including the Monetary Authority of Singapore and the Bank of Korea. In contrast, China cut certain policy rates; its broader macro policy has shifted over the last few months, with a focus on stabilising growth as headwinds mount.
Inflation in general continued to surprise on the upside, with many central banks increasing the pace of monetary policy normalisation. COVID cases have been rising across the region, but Omicron appears to account for most of these and hospitalisations have not risen meaningfully.
Central and Eastern Europe
Central banks in Romania, Hungary and the Czech Republic all increased policy rates over the month, although the latter signalled that large hikes are now behind us, with future changes likely to be "fine-tuning". Price pressures intensified in Poland, paving the way for further monetary policy tightening. Fitch affirmed Hungary's sovereign credit rating at BBB with a stable outlook,
Rest of Europe, Middle East and Africa (EMEA)
Geopolitical headwinds in the former Soviet Union dominated global news flow in January. Elsewhere, it was a quieter month for assets in Turkey, as the central bank continued to intervene to stabilise the lira. In South Africa, the Omicron wave continues to recede.
EM corporate debt highlights
Reflecting the rise in core yields, the JP Morgan CEMBI ended the month down 1.7%, with (more rate-sensitive) investment grade bonds down 1.9% and high yield bonds down 1.4%. Volatility continued in China’s real estate sector, despite positive developments at the policy level; the fourth quarter liquidity squeeze and negative sentiment spilled over into the new year.
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