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Asian credit market sentiment turns more positive in August

01 September 2021

Asia primary market volumes saw USD17.21bn printed in August, slightly under the seasonal average and lower than the USD22.61bn seen in August 2020. While the month may not seem very remarkable in terms of deal flow, it was very much a month of two halves, with early sour sentiment seeing a complete about turn mid-month for spreads to contract sharply in many sectors by month end.



Early August credit markets in Asia were quite mixed, with an ongoing rout being seen in much of the HY sector, weighed by continuing troubles at Evergrande. Adding to the negative tone was the widening regulatory crackdown by the Chinese government, which was seen to expand from the property and education sectors, to focus once again on tech, where the state is looking to take more control of data, as well as further oversight in the monopolistic aspects and profitability of these private companies. At the same time South East Asia continued to see a spike in Covid cases, prompting growth concerns for the rest of the year.

However, around mid-month spreads having drifted wider since July, in particular in the HY sector, saw a wave of bargain hunting. Many HY benchmarks that had traded wider during July gapped tighter in mid-August as traders reported investor buying. The move was then compounded by Jerome Powell at the Jackson Hole symposium, where the Fed Chairman appeared to adopt a more dovish stance, sending the USD tumbling and Asian credit spreads tighter. The net result was tighter spreads across the board for high grade debt by the end of August, with the HY sector also seeing much better performance (although some property benchmarks remained weak).

Itraxx Asia High Grade CDS (ex-Japan)



Looking at issuance by country, Chinese issuers’ monthly volume dropped to USD10.53bn in August from USD14.5bn seen in July, which marked the lowest monthly issuance in 2021 YTD and lagging behind the volume of USD13.68bn seen in August 2020. Among the new deals in August, the corporate sector accounted for USD6.08bn, which was boosted largely by the LGFV (Local Government Financial Vehicles) and SOE (State-Owned Enterprises) sectors.

Following the recent regulatory crackdown in the property and education sectors, the Chinese government turned its focus to the tech sector, hinting it will levy higher taxes on internet companies and look to take control of valuable data resources. Last month the State-Owned Assets Supervision and Administration Commission of Tianjin was reported to urge their SOEs to migrate their data from tech giants like Alibaba and Tencent to the state-owned cloud service provider. Chinese tech companies’ stocks were battered in the last few weeks, with billions of value wiped from them amidst further company investigations and punishments expected to follow. The market remains concerned that wider government regulation is set to spread further within the private sector.

In August, only one deal was issued by a technology company in the form of Baidu’s USD1bn dual-tranche sustainable issue (A3/A, Moody’s/Fitch).

In contrast, high grade LGFVs and SOEs issuers were well-received in the market with Shaoxing City Investment’s USD700m 5-year (BBB+, S&P) deal oversubscribed more than five times (USD4bn) at pricing. SOE, Shandong Gold Group’s USD600m dual-tranche (BBB-, S&P) saw its combined final books over USD10bn, which was more than 16 times over-subscription. Another notable deal was Taizhou Urban Construction and Investment Development’s USD500m 3-year (BBB, Fitch), which received orderbooks over USD1bn.

Sentiment in the property sector continued to be soft in August, with monthly volume of just USD1.63bn marking the lowest monthly issuance in four months as the Evergrande crisis deepened. The world’s most indebted property developer was reported to speed up sales of assets, including a residential project in Hong Kong to ease its liquidity crunch. On 31 August, Evergrande warned in its earnings statement saying that the company risks defaults on borrowings and loses from litigation, adding “Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group”. China Evergrande’s USD 8.75% June 2025 was seen falling further below 34c on the dollar.

Evergrande 8.75% June 2025.



Elsewhere, a Chinese CCP spokesman repeated the party policy of “House is for living, not for speculation” announcing new policies to cool the housing market, prohibiting online trading platforms from hyping up house prices and compelling landlords to limit annual rent increases to less than 5% a year.

Fellow troubled borrower Huarong Asset Management finally released its long-delayed 2020 financial results in August, revealing a ghastly loss of over RMB100bn (more than USD15bn) for last year with astonishing debt leverage of 1333 times, adding its capital buffers are still well below the bottom line of current regulations. A few days earlier, ratings agency Moody’s downgraded Huarong to Baa2 from Baa1, citing that the net loss could result in a failure to fulfil the regulator’s capital requirements.

Elsewhere, ratings agency S&P revised its rating outlook from negative to positive for Huarong affirming rating of BBB, as S&P believes that the recapitalization plan shows “a form of extraordinary support” from the government. The existing Huarong USD bonds were seen rallying to over the 90c level during August.

Turning to the financial sector, monthly issuance was USD3.16bn. China Ping An Insurance kicked the month off with a USD550m 10-year (Baa2), followed by a rare Bank of China USD500m SOFR/GBP300m dual-tranche SONIA FRN (A1/A/A). Agricultural Bank of China brought a USD800m dual-tranche (A2), and China Merchants Bank printed the first Sustainable SOFR issue in the APAC region with a USD300m 2-year Green bond (A3).

Looking at India, monthly issuance volume was USD1.9bn in August, slightly more than July’s USD1.78bn. Among the deals, Summit Digitel issued a USD500m 10-year (BBB-/BBB-) and HDFC Bank sold a USD1bn PNC5 AT1 (Ba3).

Singapore remained active in August with its monthly issuance hitting USD3.5bn, which included United Overseas Bank’s AUD750m 3-year (Aa1/AA-/AA-) and Temasek Holdings’ SGD1.5bn 50-year (Aaa/AAA).

Pipeline

Looking at the pipeline, at least six issuers have commenced marketing new bonds since August, with one announcing a roadshow in July without any further updates as yet. Also, Korea and Chinese EV battery producer CATL will start their roadshow in September.

Pipeline



League Table

Looking on the league table, DBS moved one notch higher to sixth place with the rest of the table little changed.





Asia Macro Wrap

China

In a major CCP meeting on financial and economic affairs in August, Chinese President Xi Jinping stressed efforts to promote “common prosperity” in order to “pursue high-quality development”. The meeting called for establishing “a scientific public policy system” and “a reasonable distribution system”. According to the meeting minutes, the top leaders vowed to “strengthen the regulation and adjustment of high income, protect legal income, reasonably adjust excessive income, and encourage high-income groups and enterprises to give back to society more”.

More actions to solve the income inequity then followed. Apart from discussions about the legitimation of property tax and inheritance tax, big tech firms who rely heavily on the excessive 996 overwork culture were warned about improving conditions for workers by the country’s top court and labour ministry. Elsewhere, celebrity fan culture in China was denounced by the Cyberspace Administration, China's top internet watchdog, to curb the “irrational expansion of capital”. Moreover, Zhejiang province, where the private businesses are thriving, was chosen to be the pilot area for the “common prosperity” initiative.

Turning to the economy, data has been more mixed as the economy appears to be losing steam in certain areas. In August, regional flooding along with a flare up in Covid cases led to travel restrictions and supply chain issues. On the data front, retail sales, exports and PMI were all notably lower than expectations.

China’s official August non-manufacturing PMIs plunged to 47.5 from 53.3 in the previous month, which saw the first contraction in service activity since early 2020, while manufacturing PMI declined to 50.1 from 50.4 seen in July. Another private gauge, China Caixin manufacturing PMI, which uses a smaller sample, also showed that the index had fell to its lowest since March 2020, as the recent outbreaks of Delta virus shut factories down, and transportation and raw material costs remained elevated. FY2021 GDP forecasts remain around 8.50%, however there are fears that the government’s zero-Covid strategy could result in further local lockdowns this year as the country battles against the Delta variant.

India

India continues to see cases flat-line at around 40k per day, although there is ongoing speculation of an upcoming 3rd wave as we enter the winter. In recent studies it has been estimated that around 60% of the Indian population may already have antibodies and indeed that Covid 19 is now endemic in the country. Vaccine rollout has improved as the supply of vaccines has dramatically increased, with India set to start exporting vaccines in bulk again. Meanwhile just over 50% of the country have had one jab, with the majority of the population expected to be double jabbed by early 2022.

Q1 GDP (April-June) released this week showed a 20.1% surge in growth (heavily skewed by base effects) coming in roughly in line with expectations, but on a positive note showing that the lockdowns/restrictions imposed through the past Covid wave had less economic impact than previous waves. With the link between restrictions and the economy decreasing, there are hopes that the economy can power ahead in Q2, underpinned by recent July PMI data which also showed a marked rebound versus June. FY 2021 forecasts remain around 9.0%, given no major resurgence in Covid.

South Korea

South Korea has continued to see relatively stable virus numbers through the summer, despite surges elsewhere in Asia. After seeing a bump higher in cases due to the Delta variant in July, over the past couple of weeks cases have declined back to the 1k a day level (seen through most of the year). Following a slow start, vaccination levels have increased dramatically and South Korea is on track for double jabs to have been given to 70% of the population by October and will be giving booster jabs to vulnerable groups thereafter.

The South Korean government unveiled an aggressive spending increase for its the final annual budget this week, with the record spending plan pushing South Korea’s debt to GDP levels to 50.2%, the largest on record. The emergency supplementary budget of KRW604tr is aimed at offering pandemic relief to households.

Looking ahead, continued strong fiscal stimulus from the government should support growth, with economic data generally upbeat, in particular from the labour market which should in turn support private spending. Analysts continue to expect around 3.50% for FY 2021 GDP, although downside risks would come from a surge in Covid cases this winter.

Malaysia

Former deputy Prime Minister Ismail Sabri was sworn in during as Malaysia’s ninth prime minister on 21 August, after his predecessor Muhyiddin Yassin was forced to resign due to a loss of majority support in parliament. The Muhyiddin administration was blamed for failing to curb the pandemic, as in the final month of his presidency, Malaysia struggled to deal with a huge wave of Delta Covid cases causing massive economic damage due to multiple rounds of lockdown.

The new PM urged all lawmakers to find common ground and cooperate to fight the virus and revive the economy. However, the planned first parliament meeting under the new PM was pulled on 31 August, with the reason that Ismail Sabri was in quarantine after being exposed to the virus.

Malaysia is still seeing a very high level of Covid infections and cross-district travel along with interstate tourism are restricted, especially for people who are not vaccinated. The good news is that by the end of August, more than 15 million adults were double-jabbed, representing 46% of the population.

Q2 GDP was released in August, showing a 16.1% expansion, skewed by the base effect. Seasonally adjusted though the economy contracted 2.00% from growth of 2.70% in the previous quarter, weighed on by Covid restrictions. Looking ahead analysts lowered FY2021 forecasts by around 0.50% to 3.50%, given still high Covid infections and further possible instability due to the new government’s very slim majority.

Indonesia

Indonesia appears to be finally through a terrible wave of virus cases in the country that infected over 4m people and caused over 130k fatalities. Schools in the Jakarta area have started to reopen and wider parts of the economy will start to see restrictions eased as cases hopefully continue to fall in the coming weeks. While cases in Indonesia appear to have peaked, it should be noted however that elsewhere in Asia, such as in Thailand and Vietnam, there are ongoing Covid surges. Vaccine roll out in Indonesia remains slow compared to peers, with just 16% of the country fully vaccinated. Looking ahead the Indonesian government has recently approved a number of new vaccines for use, so vaccination rates should dramatically improve.

In early August Indonesia reported Q2 (April-June) GDP data expanded 7.07%, much higher than the forecast 6.50%. The growth was the highest in 17 years, underpinned by surging exports that saw commodity shipments increase 56%. Moreover, there were strong gains in private consumption and investment helped by government spending.

However, looking ahead the Covid wave seen in July/August will have a huge drag on Q3 data with analysts busy revising forecasts lower during the summer. July PMI data (released at the start of August) showed manufacturing coming to an abrupt halt at 40.1, significantly below the 50.0 level signifying expansion or contraction. Analysts have revised FY 2021 GDP around 1.0%-0.5% lower due to the summer Covid wave, to 3.5% for FY2021 GDP.

Japan

Japan continues to see a relatively high infection rate with cases hovering around the 25k per day level for weeks now. Japan has been forced to expand its state of emergency to cover 13 prefectures from 6, with 4 put on “quasi” emergency status. The spread has been driven by the Delta variant, but also there have been reports of complacency among the Japanese. While Japan has seen a lower death rate than most countries, currently heath facilities are reaching capacity and the government is reportedly looking at setting up temporary hospitals. Vaccination has lagged behind peers with around 40% of the population currently double jabbed and Japan says that will reach 60% by the end of September.

Q2 GDP released in August showed a stronger than expected bounce-back in the economy ahead of the Olympics (April-June). GDP grew by 1.3% in Q2 versus estimates of 0.8%. The growth sharply contrasts the 3.7% slump in GDP seen in the previous quarter. However, the surge in virus numbers since the Olympics and subsequent emergency measures have prompted analysts to be cautious on Q3. Japan’s Economy Minister said in August that the government’s number one priority is to prevent the spread of the virus, as it is very bad for the situation to drag on. However as is the case in the rest of the world, as winter approaches there are fears that the numbers will only get worse. Analysts revised FY2021 GDP forecasts just a fraction lower to around 2.40% from 2.50% previously.

All data, unless otherwise stated, sourced from the Bond Radar Data Wizard

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