At first glance, Asian credit is in robust health. The volume of US dollar bond issuance from Asia excluding Japan was up 20 per cent year-on-year at the end of May, reaching USD156 billion. Green bond issuance has exploded, already doubling last year’s total.

These positives conceal a more complex picture, though. Developments in China loom over Asian credit: credit spreads for US dollar bonds issued by Chinese real estate developers – which account for about half of all corporate US dollar high yield bonds from Asia excluding Japan – have widened since the government introduced its ‘three red lines’ deleveraging policy last August.

At the macro level, many fixed income investors remain concerned about inflation and the prospect of rising interest rates, although HSBC is not looking for the US Federal Reserve to move soon and expects US Treasury yields to remain “lower for longer” – with the 10-year yield actually declining from around 1.5 per cent today to 1 per cent by the end of the year.

A new world

Asian credit will continue to perform in this new world, though, said Dilip Shahani, Head of Global Research, Asia-Pacific, at HSBC. “Lots is already in the price and there will be differentiation between the good, the bad and the ugly, but spreads will slowly tighten for a range of fundamental and technical reasons.”

Shahani said HSBC had a positive outlook for Asian credit in the second half of 2021, especially for high yield, which is dominated by Chinese real estate developers. These are one of HSBC’s preferred credit sectors for this year, along with sovereigns, conglomerates, gaming and renewables.

As government deleveraging efforts take effect, investing in Chinese real estate bonds would require balancing potential returns with careful management of the risks, said Keith Chan, Head of Corporate Credit Research, Asia-Pacific, HSBC. Stronger names would benefit a longer-term approach with the focus on greater durations, while a short-term view is more appropriate for weaker credits. The Chinese real estate high yield market has been around for 16 years and has had five major corrections, Chan pointed out. “Every correction has offered buying opportunities.”

New dynamics

Growth from other Asian markets has helped make up for relatively slower issuance from mainland China, with US dollar bond issuance from mainland issuers at its lowest relative level since 2014.1

Despite India’s devastating second wave of COVID-19, its bond markets have continued to function this year, with some sectors and structures displaying more resilience than during the first wave, said experts taking part in a panel moderated by Chetan Joshi, Head of Debt Financing Business, India, at HSBC. Investors seeking diversification are turning to Indian high yield, they said, and bond buyers also like the strong structures and predictable cash flows that characterise renewable energy issuance from the country.

In fact, the rapid growth of green, social and sustainability (GSS) issuance is changing the composition of the Asian credit market – and its likely growth trajectory. Bond sales have been led by sovereigns, banks and renewable energy firms, and GSS bonds have outperformed so far in 2021 as broader markets have stalled.

“The supply opportunity will still come from renewables and the carbon reduction trend, although we see companies from more sectors – including technology – coming to the market.” said Louisa Lam, Director, Asia Credit Research, Asia-Pacific, HSBC.

Lam added that China was accelerating the development of its onshore green bond market to meet its ambitious decarbonisation goals, but said she expected Chinese offshore green bond issuance to increase while differences remain between offshore and onshore green bond standards. “We believe investors will still focus on offshore US dollar bonds as a proxy for onshore investment.”

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