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We would like to comment on the latest news flow on China Evergrande and its impact on the Chinese corporate bond market.

September 22, 2021

  • Small likelihood of systemic risk. We believe that there is little systemic risk given any contagion risk would not be left unchecked and hence, the eventual spillover effect should be limited. The impact of Evergrande has been largely focused on the Evergrande bond complex and is to a large extent contained within China property HY sector.
  • Evergrande’s overall USD 300bn of liabilities breakdown: 150bn payables (suppliers), 30bn contract liabilities, 30bn other liabilities, 90 bn borrowings (14bn external bonds, 9bn, domestic bonds, 66bn bank loans & borrowing).
  • The JPM EM Corporate Bond Broad Diversified Index, the most common index used by market participants, have only 7%China corporate bond exposure, given its diversification rules, split between 5.6% investment grade and 1.4%high yield. Hence, limiting the extent of the drag from China HY and Real Estate sector. In EM corporate indices the weight of Evergrande as of end of August 2021 was 0.05% in the JP Morgan CEMBI Broad Diversified Index and 0.33% in the JP Morgan JACI index, respectively.
  • Orderly restructuring of Evergrande. Our base case is Evergrande’s major creditors are likely to give the company some time to monetize non-core assets, look for strategic investors, while ensuring timely completion of existing projects. In addition, if needed, we expect the government to step in to prevent a domino effect across the entire property sector, e.g. facilitating Evergrande’s asset sales, and allowing easier credit access for homebuyers. Note, we do not expect the authorities to be bailing out Evergrande’s USD bondholders.
  • Impact to China IG. We remain comfortable as the market is not expecting the potential default by Evergrande to cause systemic risk. In general, we have seen that the authorities have a strong willingness to prevent any such systemic risk from occurring. As such, we believe that the China IG space will remain stable. The valuations of this sector are not wide but we think it should still hold up well as a result of the flight to quality or up in quality resulting from the Evergrande specific problems. Similarly, for the Chinese sovereigns and quasi-sovereigns, we expect their bonds to remain stable given their strong credit fundamentals consisting of mainly central and local SOEs. They have held up relatively well in general in spite of Evergrande headlines.
  • Impact to China HY. Overall, we expect the current volatility to remain in the China HY market until the actual default of Evergrande occurs, its restructuring process begins and a loosening of policy. Within the China HY segment, better quality names have shown resilience against the Evergrande woes. Over the past month, Evergrande bonds fell by around -37% vs. around -5.5% for China HY excluding Evergrande over the same period. The better quality China HY property bonds outperformed even more over the same period, and were close to flat or declined between -3% to -4% over the period.
  • Impact to China banks. Low risk of Evergrande to the banking sector. Evergrande’s bank borrowings represents 0.2% of the system loans. Overall direct property developer exposure to the banks also appear manageable, representing around 7% of system loans, while construction loans is another 3%. Furthermore, the Asian USD bond market is largely represented by the system’s strongest banks, ie the Big 4 state banks (Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agriculture Bank of China) with strong capitalization and balance sheets.

Please see below a breakdown of Credit Suisse Asset Management Fixed Income Funds with exposure to the China Real Estate sector.

Emerging Market and Asia Bond Funds

Exposure (%) as per 31-08-2021  CS (Lux) EM Corporate BF CS (Lux) EM Corporate Investment Grade BF CS (Lux) Asia Corporate BF CS (Lux) RMB Credit BF CS (Lux) Fixed Maturity BF 2021 CS (Lux) Fixed Maturity FR BF 2023 CS (Lux) Fixed Maturity BF 2024
Evergrande 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
China Real Estate overall
10.2% 5.1% 27.3% 11.6% 14.8% 27.2% 21.9%
China Real Estate IG
0.0% 5.1% 4.6% 5.3% 2.8%
1.3% 3.2%
China Real Estate HY
10.2% 0.0% 22.7% 6.3% 12.1% 25.9% 18.7%
# of issuers
15 6 30 31 12 24 30
Avg. position in % per issuer
0.7% 0.9% 0.9% 0.4% 1.2% 1.1% 0.7%

Source: Credit Suisse.

Global Credit Bond Funds

Exposure (%) as per 31-08-2021 CS (Lux) Corporate Short Duration EUR BF CS (Lux) Corporate Short Duration USD BF CS (Lux) Floating Rate Credit Fund CS (CH) Global Corporate BF
Evergrande 0.0% 0.0% 0.0% 0.0%
China Real Estate overall
0.2% 0.4% 0.6% 0.3%
China Real Estate IG
0.2% 0.4% 0.6% 0.3%
China Real Estate HY
0.0% 0.0% 0.0% 0.0%
# of issuers
2 1 1 1
Avg. position in % per issuer
0.1% 0.4% 0.6% 0.3%

Source: Credit Suisse.

Risks

  • Bonds carry the risk of default; if the issuer defaults or goes into liquidation, investors may lose some or all of their invested capital.
  • Investments are subject to market fluctuations.
  • Investing in emerging markets involves a greater degreeof risk than investing in developed markets. Emerging market risks are characterized by a certain degree of political instability, relatively unpredictable financial markets and economic growth patterns, a financial market that is still at the development stage, or a weak economy.
  • There is no guarantee regardingthe level of coupon payments or the value of the investments at maturity or at any other time.

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