The news from the Chinese state media that Evergrande will pay the coupon on the bond that expired a month ago has raised market sentiment. If this were not the case, tomorrow the real estate giant risks the judgment of default by the rating agencies. This does not mean that China, with its program of greater economic equity, is putting pressure on sectors that have so far been high growth such as tech and real estate, a fact that has affected the country’s GDP, which has dropped to +4.9. % in the third quarter of 2021 from + 7.9% the previous one.
The decision to pay the international bond holders, even though it has come to a close, comes at a particular time. Because starting from October 29, the country will gradually enter the FTSE Russell World Government Bond Index (WGBI), which at the end of September was worth 25.727 billion dollars of assets in debt of different qualities, from triple A to triple B. BofA analysts estimate an entry of around $ 140 billion of Chinese debt securities into the index.
Months ago, when the news broke, Pan Gongsheng, deputy governor of the People’s Bank of China and director of the state foreign exchange administration, explained that by the end of February 2021, holdings in Chinese bonds of foreign investors had reached the 3.7 trillion yuan.
Meanwhile, international banks are reviewing the country’s growth expectations. According to UBS economists, GDP in the second half of the year will be lower than the first part of 2021, with an expected rate of 8%. But it will be enough to confirm the recovery in profits of type A companies (the shares traded in Shanghai and Shenzhen). The Chinese authorities supported weaker sectors, particularly small and medium-sized enterprises, through cuts in the compulsory reserve ratio of banks and a larger-than-expected medium-term loan in August.
Furthermore, the valuations of the securities in terms of price / profit are approaching their average of the last 5 years with those expected in the next 12 months destined to grow, writes UBS, by a high percentage. So much so that analysts predict that A shares will outperform short-term bonds in the next 3-12 months. Bonds, as an asset class, remain the least preferred.
Chinese equity markets are likely to remain volatile as investors assess the effect of the pandemic on economic growth and Beijing’s regulatory stance on various sectors. UBS believes the best way to overcome uncertainty is to take a balanced equity approach to both growth and value stocks.
China is gearing up for the busiest week of quarters, which kicks off on October 25th. According to Goldman Sachs’ calculations, Type A companies, Type H companies (traded in Hong Kong) and Adr (American Depositary Receipts, are securities of foreign companies that are traded in the US financial markets) should disclose accounts for a worth over $ 7 trillion. The analysts of the American investment bank expect, from macro observations (SMEs and inflation) that the Chinese non-financial sector could grow by 14% year on year.
Goldman Sachs also expects the output of the second largest economy in the world to rise by 7.8% in 2021, an expectation lower than that of UBS and + 5.5% in 2022. So far, the Chinese indices have not gone too far well, 2021 was a year particularly influenced by the political decisions taken by the government towards the new phase of more democratic growth. Shanghai, for example, has been positive by 2.27% since January, while Hang Seng, where the real estate giant Evergrande and many tech and brick stocks is traded, is in the red for almost 5%.
On the other hand, the Eurostoxx 600, the European blue chip index, gained 17.5% over the same period, the S&P 500 almost 23%, the Nasdaq nearly + 20%. (All rights reserved)
