4 August, 2021
Fiona Cheung, Head of Global Emerging Markets Fixed Income Research
China’s financial markets have recently experienced heightened volatility on the back of regulatory changes in several key sectors, such as real estate, the internet and education. In this investment note, Fiona Cheung, Head of Global Emerging Markets Fixed Income Research, details the genesis of these changes and highlights key issues that investors should be aware of moving forward. With access to both onshore and offshore insights, Fiona and her team also believe the government’s implementation should be viewed as a positive for China’s long-term socio-economic development.
Overall, we view the increased scrutiny on sectors such as real estate, the internet, and education as part of the Chinese government’s initiative to address the concerns of its citizens. With notable market movements over the past week, credit spreads moderately widened in some impacted sectorsi. We believe the macro impact of these regulatory moves should be insignificant for China’s second-half 2021 GDP and beneficial for China’s long-term socio-economic development.
First, a look at recent regulatory developments. Recent announcements went beyond the expectations of many market observers but were not a complete surprise. We believe that investors should pay close attention moving forward, as the regulatory environment may experience further changes.
Backdrop for regulatory policy changes
Having said that, we also believe investors need to understand the policy reasons behind these notable changes. Indeed, since 2017 the government has shifted its top economic priority from promoting quantitative growth to encouraging more tangible qualitative outcomes. That is, economic development should result in greater benefits for the every-day lives of citizens as opposed to merely chasing impressive headline GDP figures. Building off this framework a key goal of the recent regulatory changes is to mitigate a now shrinking national population through decreasing costs related to education, promoting family formation. The government has previously expressed concerns over potentially harmful social consequences in the following areas:
Policies promote long-term socio-economic development
In our view, the short-term impact of the new regulations shouldn’t materially affect China’s second-half economic growth trend this year. Over the longer term, it could have a positive effect on the social and economic development of the country and key sectors:
we observed that developers with ample land reserves and access to diversified funding channels in both onshore and offshore markets should be in an advantageous position.
i As of 30 July 2021, Manulife Investment Management. Chinese internet credits have been relatively well-behaved: benchmark China IG internet bonds widened around 15-20 basis points over the week, with high-beta China IG widened around 50-60 basis points.
ii 24 July 2021, a set of guidelines to ease the burden of excessive homework and off-campus tutoring for students undergoing compulsory education was jointly issued by the General Office of the Communist Party of China Central Committee and the General Office of the State Council.
iii A study published in the Chinese labor security magazine, Laodong Baozhang Shijie, shows that 84 percent of delivery staff work more than 10 hours daily. Delivery workers in Beijing, for example, spend on average up to 11.4 hours every day on the job. This piles up risks of them suffering from overwork.
iv On July 26, 2021, the State Administration for Market Regulation (SAMR) and six other departments jointly issued detailed guidelines on protecting food delivery riders’ rights and interests, such as mandatory injury protection insurance, flexible employment, and ensuring local minimum income.
v Other internet-related regulations include: 1) The Data Security Law, set to become effective on September 2021, will have more regulatory oversight on companies that possess a significant amount of personal privacy data, and their businesses are related to Critical Information Infrastructure. 2)The Cyberspace Administration of China (CAC) announced a cybersecurity inspection on certain ride-hailing platforms in early July soon after the IPOs of a few concerned companies in the US. In fact, the “Measures for Cybersecurity Review” – aim to ensure the security of critical information infrastructure and safeguard national security, has already been in effect since June 2020.
vi Holding companies entitling foreign owners to the economic benefits flowing from Chinese companies but limiting their control of the business.
vii The People’s Bank of China and the Ministry of Housing announced in 2020 that they’d drafted new financing rules for real estate companies. Developers wanting to refinance are being assessed against three thresholds: a 70% ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract, a 100% cap on net debt to equity, a cash to short-term borrowing ratio of at least one.
viii Bloomberg, 27 July 2021.
China’s double pivot — A major shift in China’s COVID and property sector policies
China recently announced a raft of policy support measures to ease COVID-related curbs, bolster financing and the property sector. Murray Collis, Chief Investment Officer, Fixed Income, Asia (ex-Japan) and Alvin Ong, Head of Fixed Income, Singapore, see opportunities in Asian credits amid China’s property market support.
Local Government Financing Vehicles – the bright spot in China credit
The Investment Grade China Local Government Financing Vehicle sector in the offshore market has delivered relatively resilient performance and recorded a significant increase in net issuance over the year to date.
Will the Fed's approach to interest-rate hikes trigger a U.S. recession?
Concerns about recession risks are rising amid seemingly persistent inflation and rising interest rates. Find out to what extent these fears are warranted.