Asian Credit 2H14: A China Story

BlackRock Asian Fixed Income team

Asian credit market has returned over 6%

YTD: 2H14 will be a carry story

So far in 2014, the hunt for yield has been very supportive for Asian fixed income. As demand lifted prices, yields compressed. While spread levels are not yet as tight as they were before the Great Financial Crisis, there may not be much more room for further spread compression. We believe that returns in the second half of the year will largely depend on carry and modest spread tightening in selected countries and sectors. We expect growth to continue improving across Asia especially economies such as China where reform agenda could affect the fortunes of Chinese credits, where the rally year to date has lagged the rest of the market.

China: the focal point in Asian credit market in 2H14

For most of 2014, investors looked warily at the Chinese market as negative newsflow kept emerging. Concerns over trusts and shadow banking, the first onshore bond default, weak macro data and noise around property sector all combined to make it a volatile start to the year. However, with government action aimed at supporting the stated growth target for 2014 of 7.5%, it looks as if a broad based recovering growth has started.

After lagging for much of the year, improving sentiment has helped Chinese credit to catch up to Asian peers, while the renminbi has returned to a strengthening trajectory. We believe China will be a focal point in Asia for the remainder on 2014, particularly now the Indian and Indonesian elections are behind us. But it is not just China that is likely to benefit from stronger economy; the recovery will positively impact countries across Asia.