Asia credit – green shoots

Fixed income investors currently face a difficult market environment. US interest rates are on an upward trajectory, prices are rising in many major economies, and the pandemic remains a global issue. But compared to other regions, Asia is well positioned to weather the storm.

Mr. Rosha was presenting the opening remarks of the HSBC 6th Asia Credit Conference – a landmark event that covers the entire spectrum of the region’s fixed income market. It started with a session that explained the key dynamics driving the Asian market in mid-2022.

A mild correction in Asia credit spread

Since the Global Financial Crisis in 2008, there have been six major corrections in Asian credit. The average increase of spreads in these events averaged 130 basis points¹, and it takes six to eight months for the market to bottom out, with another nine to 12 months required for spreads to return to pre-correction levels.

How severe is the current correction compared to other downturns that have happened over the last decade? In the first quarter of 2022, spreads widened by around 60 basis points, due to the large movement in US Treasuries and the start of the war in Ukraine. But in April and May, the market started to recover with spreads tightening. The scale of the market moves suggest that it was only a relatively mild correction.

China shows positive economic signs.

Mr. Chan cited several reasons to believe that the outlook for China could be improving. For a start, Chinese technology stocks have risen since late May, suggesting that investors are pricing in a favourable regulatory shift for the sector. Recent data shows that the local outbreaks of COVID-19 in mainland China are now under control. And although the property sector remains weak, some developers have been able to raise capital via bonds backed by standby letters of credit (SBLC).

More broadly, one of the biggest themes in China is the success of its multi-year deleveraging campaign, which can be temporarily put on hold to support the economy, said Helen Huang, Head of China Onshore Credit Research, HSBC.

She described how the corporate debt to GDP ratio has been stable since 2016, while the balance sheet quality of central SOEs has improved, creating flexibility to increase leverage. At the same time, the use of proceeds from municipal bonds can be expanded to fund infrastructure projects.

The proceeds of these bonds are predominantly directed to projects in renewable energy, green buildings and infrastructure, as well as measures aimed at increasing energy efficiency. All these projects are in line with the transition goals of governments across the region. She highlighted several developments that are set to support the development of sustainable issuance in the near term. These include China developing its own green bond catalogue last year, while this year ASEAN has released its own green taxonomy, with Singapore last month releasing the second draft of its own taxonomy.

In terms of performance, ESG bonds have shown resilience in the recent market volatility. This is most evident for investment grade bonds, with bonds rated AA, A or BBB outperforming the index. If Chinese property developers are screened out, the outperformance also applies to the high-yield segment of the market.

Asia is still compelling

As the first half of 2022 recedes into the past, credit investors can be reassured that the recent turbulence in the market was relatively mild, when compared to the other downturns that Asian bonds have experienced in recent years. Looking to the future, investors can now focus on signs of recovery. These include indications that China is stabilising, as well as healthy growth in the issuance of ESG-labelled bonds. As a result, Asia will remain a compelling region for international credit investors.