Article / 07 September 2016 at 10:30 GMT

Weekly Bond Update: China in your hand

Head of Fixed Income / Saxo Bank
  • Fear of Chinese contraction overblown, particularly given EM baseline
  • Chinese stock programmes open up capital markets, impact favourable
  • Alibaba bond issuance shows there is lots of demand for Chinese assets

Hong Kong is rising high
Saxo Bank head of fixed income Simon Fasdal taking a firsthand 
look at the Hong Kong economy. Photo: Simon Fasdal

By Simon Fasdal

As we entered 2016, the fear of low growth in China was one of the main triggers for volatility and instability on financial markets. The continued decline in oil prices was partly blamed on China, and the demand slowdown as well. Reading headlines from European news sources, it seemed like China was literally falling off its bike – but this could not be more untrue. 

Growth is undeniably lower in China, but compared to Europe, China is expanding with a GDP expansion of 6.6% (Q2'16) whereas the Eurozone is bumping forward with a 1.5% reading. Viewed in the context of the low or even negative growth seen in other emerging economies – Russia and Brazil, for example – China's outperformance begins to reassert itself.

Lower oil prices – which have been a fear factor for nearly a year, causing volatility in early 2016 and hampering commodity-exporters – are actually a key benefit for China. The fact that the world is drowning in oil has removed focus from some of the underlying positive GDP factors, but make no mistake: lower oil has saved the Chinese economy trillions of dollars, as China is one of the world's main exporter-nations. 

This is also one reason why China has stockpiled crude over the last couple of years, sending strategic inventories to record highs. In other words, every container that could possibly hold some black gold, will hold it!

As we have now entered a more positive stage with indicators starting to pick up slowly, it would be wise to examine whether any black clouds lie on the horizon. There is no doubt, as mentioned by Chinese leaders themselves at the opening of the G20 summit, that the world economy is unsafe and uncertainty exists. 

If we focus on China exclusively, however, there are small pockets of positive developments...

Chinese Indicators aim higher

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Source: Saxo Bank 

... at the moment, some of these are as follows:

  • Indicators do point higher, and the next coming month can confirm if we have a shift in trend.
  • China has managed the very tough game of depreciating the RMB while at the same time stabilising its FX reserves – a key mid-2015 fear among investors
  • The "credit bomb" fear that showed its face this April is disappearing and credit spreads have contracted since. This is also a result of a general positive sentiment for all emerging markets.

These factors, combined with the small uptick in activity indices, are signs that we are entering a new, more positive (albeit still modest) stage of the Chinese economy. The risks are many, of course – we could still see a credit event triggering a broad fear of Chinese assets, and a global reduction in risk appetite could hit Chinese markets and bring new uncertainty to the RMB. 

Having said that, the positive signs are undeniably growing clearer. The structural reforms that China has worked so hard on, including state-owned enterprise restructuring, could pay off soon. Combined with the opening of both the Shanghai and Shenzhen Capital markets to globalisation via the Shanghai-Hong Kong and Shenzhen-Hong Kong money trains, these are pretty strong forces that could revitalise Chinese capital markets and bring in foreign cashflows, which are vital for the country's future prosperity. 

But do investors dare enter Chinese markets? The short answer is yes. A larger share of the Chinese capital markets open for globalisation will undeniably bring in a higher allocation (key for global fund managers), especially as the country's growth levels and future outlook have a lot of potential compared to other EM and DM economies where weaker tones are still on the agenda. 

Ad for the evidence? How about the Alibaba bond issuance in late 2014 – a record $8 billion deal that came in the wake of market speculation that there might not be sufficient demand. The bonds were oversubscribed 7.2 times with an overwhelming $57bn worth of orders from investors. In this case as in (we suspect) others, demand was hardly the problem.

— Edited by Michael McKenna

Saxo Bank head of fixed income Simon Fasdal is currently touring China and Asia.


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