As we had highlighted in our Insights weekly (see Credit: China’s new policy measures to support refinancing and real estate, 14 Nov), China’s 16-point plan to support the property sector should allow the market to price in less pessimistic outcomes in China credit. Indeed, our China DACS index showed a 15bps compression this week, marking the largest spread compression since Aug 2021 in China USD credit. We believe policy guidance on extending loan terms and bond repayments should help larger and financially stronger developers. Entities that have already defaulted, or already teetering on the edge of default, are not likely to benefit. As such, spread compression was almost entirely concentrated in IG-rated China USD credit, with HY credit notably seeing wider spreads instead for the week.
However, good news for China growth has proven to be bad news for RMB credit, quite unlike the case of China USD credit. For one, markets are now pricing in a catch-up in RMB rates, with Chinese growth becoming less of a worry amid stronger property sector support. Yields on short-term RMB credit will inevitably track the spike in 1Y RMB rate, which has already soared by a whopping 25bps this week. Second, Chinese investors are also rotating from fixed income products like WMPs to equities as they re-embrace risks. WMPs are mostly invested in short-term RMB credit, and large redemptions inevitably result in large sales. The RMB credit market was never known for good liquidity in the best of times, and liquidity will clearly be an issue given the reportedly high volume of sales. As such, worsening RMB credit liquidity in such a context should not be a major concern, and we continue to expect further spread compression in China USD credit for now. At the G20 summit, there were signs of a slight thawing of relations between US and Chinese leaders. This may, hopefully, portend more supportive policy developments post the US mid-term elections.
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