Fluctuations in Chinese bonds threaten global debt investors

The actions taken in Beijing are affecting Chinese corporate bonds and spilling over into global markets thanks to American and European fund managers who have been filling up on stocks in recent years.

Emerging market investors have long been subjected to such shocks, but Chinese bonds are now held so widely that their price movements affect even bond funds that do not specialize in developing countries, including managed funds. by companies such as Pacific Investment Management Co.. and BlackRock Inc.

Global bond funds with the most Chinese corporate debt have fallen behind their benchmarks in the month ending Thursday, according to Wall Street Journal analysis of Morningstar data Inc.

The underperformance coincides with declines in stocks and bonds of private Chinese education, technology and real estate companies, triggered by regulatory and policy changes.

Chinese authorities recently unveiled plans to establish private education companies such as New Oriental Education & Technology Group Inc.

nonprofit and curb tech companies including delivery company Meituan and internet giant Alibaba Group Holding Ltd.

The government has also sent signals that it wants to curb excessive borrowing by real estate developers. Fears grew in July that the heavily indebted real estate company China Evergrande Group could default on its bonds.

Of the 10 non-emerging market bond funds with the largest holdings of Chinese corporate bonds by dollar amount, nine underperformed their benchmarks at the height of recent turmoil in Chinese debt markets, based on Morningstar data analysis. Some fund performance has turned positive in recent days with the rebound in Chinese corporate bond prices.

There is likely more trouble to come, especially for real estate companies with bad credit ratings, said Neuberger Berman Group LLC emerging markets fund manager Nish Popat. “We don’t think we’re completely out of the woods yet,” he said.

Quality bonds are also threatened. Prices for Meituan’s triple-B-rated bond due in 2030 fell to around 91 cents on the dollar on Friday, according to MarketAxess data, down from face value, or 100 cents, in mid-July. . As a sign of the increased regulatory scrutiny facing Meituan, the Wall Street Journal reported on Friday that Chinese regulators plan to impose an antitrust fine of around $ 1 billion on the company.

Chinese tech stocks popular with US investors have fallen amid the country’s regulatory crackdown on tech companies. WSJ explains some of the new risks investors face when buying shares of companies like Didi or Tencent. Composite photo: Michelle Inez Simon

Chinese companies have about $ 6.55 billion in bonds outstanding, including $ 752 billion sold in foreign currencies such as the dollar, according to the International Capital Market Association. After taking into account public debt, the Chinese domestic bond market stands at around $ 15 trillion, making it the second largest after the United States.

At the same time, global bond funds managed by Western fund managers have grown, meaning that even small allocations to Chinese debt can add up to large sums.

BlackRock’s $ 42 billion Strategic Income Opportunities Fund recently reported a 1.45% position in Chinese non-government debt to Morningstar, amounting to around $ 610 million. Non-government debt consists primarily of corporate bonds, but includes other assets such as municipal and asset-backed bonds, according to Morningstar.

Other fund managers have made big bets on Chinese high yield bonds to offset record interest rates on corporate debt in the US and Europe. Pimco’s $ 20 billion Global Investment Grade Credit Fund announced an allocation of around 5%, or $ 1 billion, in Chinese non-government bonds to Morningstar. Chinese tech company bonds return around 0.9 percentage points higher than US investment grade bonds, Citigroup study finds Inc.

The BlackRock and Pimco funds have tracked their benchmarks by around a tenth of a percentage point over the past month, but a global bond fund manager has largely underestimated due to a large bet on Chinese companies.

UK-based Fidelity International’s $ 3 billion enhanced reserve fund has about 20% of its investment, or $ 600 million, in Chinese corporate bonds, a spokesperson for the company said. The fund underperformed its benchmark by 1.77 percentage points in the month that ended last Thursday and has since reduced the underperformance to around half a percentage point, according to Morningstar data. .

“The Fidelity Enhanced Reserve Fund is a very diverse portfolio (over 400 stocks) of high quality corporate bonds,” Morgan Lau, Fidelity portfolio manager, said in an email. The fund “has only felt a limited impact from recent volatility,” he said.

Some analysts have recommended that investors use the recent sell-off to hunt for bargains. “At current levels, we think Chinese credit looks relatively attractive,” Citigroup’s emerging market research team said late last month, recommending clients buy more Chinese corporate debt.

Write to Matt Wirz at [email protected]

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Carol M. Barragan

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