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POSTS BY SANDRA CHOW
  • China: $ Bond - Why Issue and Where Should It Price? 

    10 Sep 2017
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    • China is reported to be readying a dollar sovereign issue. We expect it to price at the tightest end of the EM external sovereign index, inside highly rated sovereigns including Korea, Hong Kong and Israel. This is thanks to what we expect will be a strong technical bid from Chinese banks.
    • China doesn't have to issue external debt which raises questions about why the sovereign is issuing at this stage. 
    • Credit growth has slowed but remains well above nominal GDP, and there are long term questions about the viability of the investments toward which credit is going. That has left the Chinese economy very imbalanced, but those imbalances are largely domestic. Foreign currency debt remains low, both at a sovereign and whole economy level.
    • China's still extremely high reserves amount to close to double the stock of external debt, both public and private and close to 19 months of imports of goods and services. Reserve drain has also been halted as outflows have been curbed sharply in 2017.
  • EM Weekly: Beta Sell-Off, Asia Least Hard Hit

    13 Aug 2017
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    • Risk assets took a bump last week largely due to global, rather than EM, factors. DM underperformed EM in excess return terms. In IG, EM corporates generated excess returns of minus 0.38% versus minus 0.54% on DM. In HY corporates a similar story was true with excess returns of minus 0.44% versus minus 1.12% on DM.  
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    • One of the drivers of the risk off tone last week was the war of words between US President Donald Trump and North Korea's leader Kim Jong-un. That hit the Korean won hardest, it fell 1.64% versus the dollar over the week. Asian currencies were generally weaker last week, with the exception of the Chinese renminbi which strengthened by 0.98%. But in hard currency, the opposite was true with Korean names and sovereign debt generally outperforming IG counterparts.  
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    • In fact the hardest hit last week in the hard currency corporate and sovereign indices were the LatAm and sub-Saharan African credits which are usually caught up in any beta sell off regardless of the driver. Asian names, which tend to be tighter, higher rated and more defensive were the strongest performing last week in that risk-off environment, including Korea.
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    • Notable outliers to those broad moves last week included Teva which continued to sell off for a second week with very high trade volumes persisting after weaker 2Q17 results in the week before last. Teva was down by 1.62% in excess return terms. Venezuela and PDVSA were also among the bottom of the high yield indices' constituents for performance last week and continued to be very volatile, falling on average by 3.32% and 3.69% respectively in price terms last week. Kenya was at the stronger end of the sovereign index last week with excess returns of 0.71%, after relief that last week's elections didn't turn to violence, albeit with the result still being disputed and strikes planned on Monday.
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    • Issuance slowed to a trickle last week with $2.5 bn priced, of which $1.7 bn was rated high yield. The only sovereign new issue was Gabon (B3/B+) which priced a $200 mn tap of its 6.95% 2025 notes. There are several other sovereign new issues being rumoured as coming in the second half of August or early Autumn including Bahrain (euros), $2 bn from Oman and $3 bn from Nigeria.
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  • China Property Trip Notes May 2017: Tug-of-War

    10 Jul 2017
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    • We visited 4 'hot' cities last month, namely, Wuhan, Hefei, Nanjing and Shanghai. These cities are classified as 'hot' property markets by the Chinese government. Why? The average price of a newly constructed homes jumped ~31.4%, ~48.1%, ~51.4% and ~56.0% from January 2015 to April 2017 in Wuhan, Hefei, Nanjing and Shanghai, respectively. The respective local governments tried to rein the runaway home prices by implementing tighter housing measures. However, our recent trip indicates that these restrictive measures have not been very effective. The sales volume did decline after the introduction of tighter measures, but the average home prices remained relatively resilient.
    • Most of the projects in Shanghai (Tier-1 city) and Nanjing (upper Tier-2 city) were able to achieve high gross profit margins ("GPMs") of ~50% or above, while those in Wuhan (mid Tier-2 city) were in excess of 30%. Projects in Hefei were also at a decent GPM of above 25%, despite being a lower Tier-2 city. Given the decent to high GPMs, we can understand why many developers want to operate in these 4 cities.
    • The Chinese developers and the local governments seem to be engaged in a game of 'tug-of-war'. The local governments are delaying or suspending fresh pre-sales permits for projects with high average selling prices ("ASPs"). On the other hand, Chinese developers are not willing to lower their ASPs to meet the price caps imposed by the local governments. Most local governments' revenues are dependent on business/sales tax on property transactions, land sales, and income and land appreciation taxes from the developers. Developers are dependent on the sale of properties to generate cash flow to fund their operations. Who will cave in eventually? We think it depends which party has deeper pockets.
    • The supply-demand mismatch has led to an inventory shortage especially in the larger cities. On one hand, developers want to delay the launches of their projects in hopes of higher ASPs. On the other hand, home buyers are bringing forward the purchases in view that ASPs may increase after restrictions are lifted and borrowing might become more expensive in the future. Aggravated by the influx of migrants, entire phases of projects are sold out in a matter of days. Please refer to the body of this report for the common themes across the property markets for all 4 cities.
  • PBOC Monthly: Onshore Corporate Bonds - Dead or Alive?

    22 Jun 2017
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    • Local government bond issuance has roared back to life but corporate bond financing saw the largest monthly net decline since at least 2011. Other non-bank financing was also weak in May, with outstanding entrusted loans and undiscounted bills falling on a net basis. 
    • Bank lending rose by 12.8% YoY and was the main driver of social financing growth which grew 13.0%. Household loan growth peaked in April and decelerated slightly to 24.3% YoY in May. There are multiple reports of tighter controls on the housing market, though there is not yet specific data on mortgage lending for May. Corporate loan growth picked up further to 8.5%. 
    • The weak corporate bond market is a major risk for economic growth and for corporate credit quality.  The PBOC could inject liquidity to bring down short term rates, which should reopen the bond market, but this means shifting the focus away from 'deleveraging' and might also risk renewed concerns over capital outflows. China has enjoyed relative external stability this year but this could change if the USD strengthens as and when US inflation and rates pick up or as the Fed commences plans to reduce its balance sheet. 
    • Refinancing costs have risen by over 100 bp on short dated commercial paper issued in 2015-16 when yields were low. They have risen by less on longer-dated bonds issued prior to 2015. There is some RMB 1.4 bn of commercial paper due to mature in the remaining months of 2017, with the largest issuance from the manufacturing, utilities and mining sectors.
    • Issuers of longer-dated bonds might not face a big increase in refinancing costs but could instead face the risk of being entirely unable to issue. The real estate sector in particular has a sizable amount of bonds coming due or turning putable in the remaining months of 2017 but gross issuance has been negligible in the last few months due to regulatory restrictions. Other sectors with large amounts of issuance coming due include manufacturing, conglomerates, construction and mining.