China is on a self-imposed credit crunch, says analyst

A self-imposed credit crunch: We expect credit conditions in China to remain challenging even against an uncertain global outlook and remain a headwind for China high yield markets. At the same time, we see a role for China as a ‘central banker of last resort’ should regional funding markets dry up, and expect investment grade SOEs to be increasingly viewed as safe havens.

Credit conditions in China will likely remain tight: Credit is being re-regulated and tightened through a broad set of policies aimed as much at preventing bigger asset quality problems in the wake of the 2008/09 credit boom as reining in inflation. Such policy is probably prudent, but makes for a challenging credit environment.

China High Yield –still too early to buy: This self-imposed credit crunch increases the risk of default and drives supply into offshore bond markets. We have been neutral, think valuations are increasingly interesting, but the critical catalyst for turning more constructive need to be sustainably easier credit conditions –the sector has never performed without it in the past.

May have to become ‘central banker of last resort’ for the region: Weaker funding markets remain a key risk to regional credit markets, but China’s reserves put it in a position to become ‘central banker of last resort’ should funding markets dry up. China could be reappraised from source of credit risk to safe haven.

China Investment Grade SOEs – cheap and safe: Chinese IG SOEs have been major underperformers YTD, but they have many advantages in the current environment, including high liquidity balances, preferential access to funding, and support from the strongest sovereign in the region.