Growth rate not reliable indicator of corporate debt

There is generally not a strong correlation between Chinese growth and Chinese corporate credit spreads. From 2011 to early 2013, these credit spreads continued tightening as the country’s GDP growth slowed – the opposite of what you might expect in a deteriorating environment.

In the past two years, strong technical forces and a search for yield have been key influences. Another is the evolving mix of the Chinese economy. Indeed, the underlying drivers of growth are more important to any investment decisions in China than the headline GDP growth number alone.

Consider the Chinese property sector, which represents 33 per cent of the country’s USD corporate debt market. In spite of slowing growth and concerns over restrictive policies to prevent a property bubble, sales continue to be resilient. In fact, Chinese property has been one of the best-performing sectors in Asian corporate debt in the past year. But even though property sales have been strong, this has not translated into equally robust construction demand as property developers have looked to clear their inventory.

The implications are mixed for Chinese corporates. On the one hand a conservative growth strategy has led to an improving credit profile for property developers, but weaker construction demand has contributed to disappointing earnings for other companies reliant on demand for construction materials such as steel and cement.

There are a number of other factors to consider:

• In spite of slower GDP headline growth, housing demand has been strong given a high household savings rate, selective policy easing and rising wages.

• Policy rhetoric does not always translate into implementation across the board. Implementation of policies can vary regionally, and has been reactive to local economic and social conditions. For instance, in Beijing and Shanghai, real estate purchase restriction measures are much more tightly enforced than in many other cities due to more speculative demand from non-locals.

• Demand in the Chinese property market can vary across different regions and market segments, and we simply cannot generalise or extrapolate from past trends. For example, in 2010, property sales volume in Shanghai dropped 39 per cent while nationally it grew 10 per cent. Year-to-date through July, sales in Shanghai are up 32 per cent against 26 per cent nationally.

Taking a broader view, Asian growth is moderating, largely driven by higher global interest rates, weaker investment and commodity demand. More positively, household balance-sheets remain strong and the outlook for exports is improving. There are opportunities in sectors that benefit from a developed-market upswing or household demand.

Sean Jutahkiti is head of Asian credit research within the emerging markets debt team at Neuberger Berman