Goldman Sachs has a positive view of Chinese credit, finding that debt levels for non-financial companies improved in 2016 over the previous year, due to better earnings in the second half of the year. Analysts also expect China’s domestic bond market to attract an additional US$1 trillion of fixed income investment over the next decade:
“We recently updated our credit analysis for listed Chinese non-financial companies, and we found that the median levels for gross debt/EBITDA (2.1x) and net debt/EBITDA (-0.2x) ratio improved in 2016 from the previous year. Also improved was the percentage of debt issued by companies with an interest coverage ratio below 1x, falling to 9% from 14% in 2015.
The improvements were mostly due to better earnings in upstream sectors in 2H16, coinciding with PPI inflation turning positive and a rebound in commodity prices. With leverage having improved over the past year, we see room for policies to tighten without resulting in widespread corporate distress (GMD, 31 May 2017).
Although the May Caixin manufacturing PMI fell to 49.6, the May NBS manufacturing PMI was unchanged at 51.2, implying stable sequential activity growth in the manufacturing sector. Together with the improvements in corporate leverage, they support our view that credit spreads will remain tight.
We expect China’s domestic bond market will become an increasingly important asset class. We expect more than USD 1tn of additional global fixed income investments to be allocated to this market over the next decade (China Credit Strategy, 1 June 2017).
With our US economists expecting a faster pace of Fed hikes than what is priced in the market, we prefer shorter duration and see the best relative value in higher-spread 3-5yr duration IG credits. Sectors we like are China non-LGFV corporates, China AMCs, Korea & HK IG and Regional Tier II securities. IG sectors we would avoid are Malaysia and China LGFVs. For HY, we favor Indo HY and are negative on the China property sector. We see room for Indo sovereign spreads to tighten further.”