Bond defaults in China are no cause for undue alarm, BlackRock executives said on Wednesday, pointing out that deleveraging moves entail some pain that could ultimately lead to an improved corporate landscape.
Lu Wenjie, BlackRock’s China investment strategist, said at a news conference in Hong Kong that the rise in defaults noticed recently is the outcome of the deleveraging policy championed by the Chinese government.
Authorities will tolerate a certain amount of default cases during the deleveraging process, as such developments can prove “healthy” for long-term development of the nation’s bond market, Lu said.
“This is actually the master plan of the Chinese government for years,” Lu said, as his firm released its 2018 Mid-year Global Investment Outlook.
“It is, as I said before, quite healthy.”
Gregor Carle, BlackRock’s chief fixed-income product strategist in Asia, said the default rate of Chinese firms remains quite low, at around one percent as compared with the global 4 to 4.5 percent default rate over the long term.
He also said the default rate increase is “not new” as it is a process of economic development in any emerging market.
“Over time, markets, China and elsewhere, have gone through this development phase, and I would say that China is going through that phase just now,” Carle pointed out.
According to a Bloomberg report, Chinese companies have defaulted on about 16.5 billion yuan of public bond payments in total in the first half this year, comparing to around 20.7 billion yuan in the whole of 2017.
The defaults are expected to break a record for the country this year, as de-leveraging continues and trade conflicts weigh on the economy.
Still, Lu believes the situation is manageable and the risks are not too big.
A US trade war is unlikely to dent China’s prospects, Lu said, noting that the competitive advantage of China as the world factory remains strong.
US trade tariffs, rather than hurting Beijing, will harm American firms that do their manufacturing in China, the executive said.
In other comments, Lu said the main challenge for China will be in high-tech sector given the nation’s dependence on imported technologies.
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