investment viewpoints

Has China broken the ‘doom-loop’? An Asia credit perspective

Assessing Asia’s macroeconomic sustainability
Dhiraj Bajaj - CIO, Asia Fixed Income and Equities

Dhiraj Bajaj

CIO, Asia Fixed Income and Equities
Nivedita Sunil - Portfolio Manager

Nivedita Sunil

Portfolio Manager

The confluence of disinflationary trends taking hold in the US, and a decisive turn in Chinese policy, has broken the doom-loop for Chinese assets and Asian credit which has plagued markets since the third quarter of 2021.


Need to know

  • China’s leaders have moved further and faster than expected in rolling back restrictive pandemic measures. At the same time, officials have initiated support for property developers
  • A full recovery is expected to take some time, but there are already encouraging signs in transportation, retail sales, recreation and home sales
  • China’s reopening and strong economic policy support measures will likely prove supportive for the Asian credit market


China gets back on track

China has made two sweeping policy changes since November. First, it has dismantled various key zero-Covid pandemic control measures. Second, it has provided supportive policies for key and large remaining property developers to help resurrect them. The policy measures are the strongest, clearest and most positive ones yet, and are all being done to ensure China gets back on the path of economic growth.

China’s significant policy pivot was unexpected. Market consensus had it that China would loosen its zero-Covid policy in the second quarter of next year after the Party congress’s economic meeting in March, and even the most optimistic projections had it that China would only abandon its zero-Covid stance ‘abruptly’ in April 2023. However, China’s leaders have now surprised everyone with officials downplaying the risk of Covid, with a top medical adviser saying that the fatality rate from the omicron variant is in line with influenza.


The world’s largest post-pandemic reopening?

A complete return to normal in China will take at least another six months, but economic activity is likely to bottom out now or in early 2023. Green shoots are already emerging for transportation, retail sales, recreation and even home sales in December as mobility improves. This will now likely mark the largest post-Covid reopening in the world, which will play out in 2023.

However, we believe a recovery in consumer sentiment and retail spending will happen gradually as Chinese households did not get cash handouts like those in the US and Europe. Additionally, the real estate crisis, as well as deteriorating household balance sheets, created negative wealth effects which will take time to reverse. The flip side of this is that the economic and corporate earnings recovery will be prolonged, similar to that of the US after the 2008 financial crisis, and investors are likely to have ample opportunity to benefit from the recovery across credit and equities for many quarters.

Within the property sector, which continues to generate at least quarter of the nation’s GDP, China has announced that its key mega and policy banks will provide as much as RMB 1.5-2 trillion in credit lines and liquidity support to the top dozen property developers, including key large private sector ones. We expect the industry to achieve net cash flow breakeven in the first half of 2023 and to return to pre-Covid utilisation and revenue levels in 2024.


Looking beyond China

Overall, we expect the Asian credit market to continue enjoying strong tailwinds from China’s reopening and strong economic policies. The lack of new Asian primary-market debt issuance, high fund cash balances, investors’ defensive positioning and lack of secondary bonds on dealer balance sheets are further driving the market higher. We have also noticed inflows returning to the asset class.

Away from China, there are secular growth and investment trends emerging in India and Indonesia, which should support a strong growth trajectory in both those economies. For India, infrastructure investing has been at decade highs over the past two years. Bank balance sheets are much stronger with higher profitability and better asset quality. Bank credit growth is now at an 8-year high, supporting growth in the system. Going into next year, private capex should also start to support growth and we expect to be around 6.5-7% next year as well. Indonesia is also seeing continued foreign direct investment (FDI) inflows as they expand their electric vehicle (EV) supply chain capabilities further, which should continue to support their growth resilience into next year.

The expected relative improvement in the fundamentals in Asia into 2023 is yet to be reflected in valuations. Valuation differentials versus US credit is still close to the wides at the moment.

Possible US policy and Treasury yield paths, China’s grand reopening and its implications, the secular growth for South & South East Asia, Asia credit primary supply outlook, the changing face of Asia high yield (HY) and top opportunities for the coming year will feature in the 2023 Asia fixed income outlook next month.

important information.

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited  which is authorized and regulated by the FCA. ©2022 Lombard Odier IM. All rights reserved