Issuers, bankers and investors ended last year with the certainty that things could only get better in Asia’s bond market. Instead, in the first two months of 2022 they somehow got worse.
Asia had often seemed like a safe haven in emerging markets, but last year Chinese credit managed to roil global markets, to the extent that the Federal Reserve had to answer questions about how Chinese property bond defaults might impact the US economy.
Major changes to Chinese regulations in sectors like technology and education, along with policies that crimped liquidity to property developers, shook investor confidence and sent yields higher.
In a region where China accounts for more than half of the offshore issuance, that weakness even affected spreads for deals from other countries.
Investors hate uncertainty, and much of it has yet to lift. China seems close to finalising regulations for the tech sector, but it is still possible more companies might find themselves singled out for closer scrutiny if their footprints become too sprawling.
Meanwhile, investors are anxiously waiting for China to announce some supportive policies for the property sector, as more developers default or ask for maturity extensions.
The Fed’s expected string of rate hikes this year was already expected to dampen demand for emerging markets, but Russia’s invasion of Ukraine in February, two days after this roundtable took place, weakened risk sentiment globally. On top of that, the Covid-19 pandemic has seen a resurgence in parts of China, which is likely to weigh on economic growth.
Global macroeconomic events will take their course, but if China were to finish revamping its latest industry regulations or introduce supportive policies it would be a welcome boost.
Predicting how the rest of the year will look in Asian credit is a daunting task, but market watchers would be justified in thinking that the current environment represents a nadir. Many issuers, including sovereigns, have stayed on the sidelines due to volatility instead of beginning the year by frontloading issuance, so when markets stabilize there is sure to be a rush of activity, as delayed supply meets pent-up demand.
The high levels of issuance in recent years means, inevitably, that many issuers have refinancing needs. Many will wait for a few months in the hope that global market conditions will settle down again, but in the end they will have to return to the market.
The Asian G3 bond market has often swung between famine and feast, with as many as 10 deals a day when conditions are good.
The boom times will be back, but the shocks of 2021 provided a valuable reminder that some risks had been mispriced.
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