Last month, a series of high-profile defaults involving state-owned companies in China — normally a safe bet for investors — jolted the credit market and rattled investors. It led to a bond market sell-off in China. China’s onshore bond market is worth $13 trillion and is the world’s second largest.
Global investors should go for central and local government bonds, Bo Zhuang, chief China economist at TS Lombard, told CNBC’s “Street Signs Asia” on Wednesday. “It’s quite unlikely to have a default, even though other segments of China might be facing all these default risks,” he said, comparing government bonds to corporate bonds. “Even (state-owned enterprises) are not actually immune (to) the defaults. “So, stick to the government, and maybe you can buy the policy banks, financial bonds, which are also quasi-sovereign,” Zhuang said.
He added that risks haven’t been “properly priced” in by the government-supported firms. “That is why there has been an implicit guarantee for entities tied to the government,” Zhuang said, referring to the long-held government guarantee for state-owned companies’ bonds. Defaults by government-supported firms in China were rare before this month’s high-profile cases involving state-owned miner Yongcheng Coal and Electricity and government-backed chipmaker Tsinghua Unigroup, among others.
Bonds to avoid
Meanwhile, S&P Global Ratings said in a note Wednesday that the next type of Chinese state-owned companies that could come under greater pressure will be the so-called local government financing vehicles (LGFVs). Such companies are usually wholly owned by local and regional governments in China, and were set up to fund public infrastructure projects. Bonds issued by such firms surged this year, amid an infrastructure push as the Chinese economy improved, according to an S&P report earlier this year.