Fixed Income Story of the Month: Chinese capital markets - the Janus-faced dragon

Capital markets in China both mainland and offshore faced a rocky ride in 2022 with multiple headwinds.

Aside from geopolitical tensions with companies and the government maneuvering between economic interests in the Western World and traditional ties with Russia, the renewed Covid outbreaks sparked growth fears and the impact from the deflation of the domestic property bubble was very perceptible. The following figures show how different segments of the capital market fared in this volatile environment:

Source: Bloomberg, ICE per 28.04.2022

Chinese equities underperformed in this environment with specifically mainland stocks being hit. A similar pattern holds true in the high-yield market with particularly real-estate names being in focus. On the other hand, Chinese investment-grade credit did relatively well mainly supported from financials and telcos. Also, sovereign yields held up relatively well in a context of rising rates across global markets in the face of record-high inflation rates.

There are plenty of uncertainties in key market drivers going forward:

How will the zero-Covid policy of the Chinese government impact growth prospects and vulnerable global supply chains? Will there be additional stimulus to mitigate the impact of the Covid outbreaks? Will the regulatory crackdown on large companies continue or will there be some kind of relief? Which additional impact do shivers from the real-estate sector have on economic activity and the banking system going forward? How does the geopolitical scenery in terms of a new cold war play out? What is the impact of sanctions and countersanctions on Chinese multinational companies?

The remainder of the year will be crucial for China going forward and above-average volatility in the Chinese market is probably here to stay with potential interesting investment opportunities along the way.