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  • Economic Trends

    Defaults Rise as China Tapers

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    April 30, 2021

    Is China’s post-pandemic recovery peaking or not? April’s activity gauges sent mixed signals. The official purchasing managers indices (PMIs)disappointed, but the Caixin manufacturing PMI—which has a larger share of private companies—accelerated more than expected. All PMIs, however, stayed well in expansion territory. The question now is what authorities are going to do policy-wise.

    China had already started tightening. We can clearly see this in higher interbank rates and the slowing credit impulse. A certain level of policy accommodation is still being maintained, in the form of extended tax breaks for privately owned small companies, stable benchmark rates, and interbank rates that are still a bit lower than pre-COVID averages. This makes sense, given the virus’s resurgences both in China and abroad. But the overall direction is clear: large-scale financial support is “out” (commodity-exporting emerging markets might want to take note), and financial stability is “in”.

    Interbank Rates Remain Below Pre-COVID Average

    Interbank Rates Remain Below Pre-COVID Average

    Source: Bloomberg. Data as of 4/30/2021.

    And this brings us to the next question: Would authorities continue to have enough confidence to deal with moral hazard and allow more corporate defaults if future data releases confirm that the peak recovery is behind us? Defaults were rising steadily this year—both among onshore and offshore corporate issuers.

    Corporate Defaults Are Rising

    Corporate Defaults Are Rising

    Source: Bloomberg. Data as of 4/23/2021.

    What is interesting, however, is that corporate spreads did not widen as much as the 2018 corporate default episode would suggest—at least in Q1. If April’s uptick in spreads turns out to be a false alarm, this may be interpreted as a sign that the economy is mature enough to handle defaults without jeopardizing the stability of the system as a whole. We would also add that the default “universe” is not homogenous. There is a strong sectoral aspect, with more defaults among real estate and technology companies. There is also a regional component, with more corporate defaults in North China than in South China. We believe all these factors leave enough room for a tried and tested targeted approach—depending on the realities of the post-pandemic recovery in China and the rest of the world. Stay tuned!

    Corporate Spreads Relatively Steady Despite Defaults

    Corporate Spreads Relatively Steady Despite Defaults

    Source: UBS, Bloomberg. Data as of 4/23/2021.


    1Purchasing managers index (PMI) is an economic indicator derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction. We believe PMIs are a better indicator of the health of the Chinese economy than the gross domestic product (GDP) number, which is politicized and is a composite in any case. The manufacturing and non-manufacturing, or service, PMIs have been separated in order to understand the different sectors of the economy. These days, we believe the manufacturing PMI is the number to watch for cyclicality.

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