China´s corporate debt: Triaging in progress

With ~18% of global outstanding debt currently yielding in negative territory, investors are increasingly looking for yield-enhancing opportunities in higher risk Emerging Market assets. In this context, China has emerged as a big capital hook, given its resilient economy, stable currency and relatively liquid fixed income market. 

Despite the recent increase in global long-term rates, the portion of negative-yielding debt remains non-negligible, making it increasingly difficult for investors to get decent yields. To put things into perspective, there are currently ~USD12trn negative-yielding bonds in a USD67trn market, according to broad fixed income aggregates; this means that ~18% of global outstanding debt is currently yielding in negative territory. 

In this context, and despite the initial outflows in March 2020, investors have continuously been shipping capital overseas, targeting Emerging Market (EM) assets, which due to their higher risk profile and ex-core currency denomination offer an interesting yield-enhancing opportunity. At this point in time, inflows into EMs continue at a relatively steady pace and are stabilizing. 

Across different segments within the Chinese fixed income market, the CNY government bond market has attracted more and more investor attention, given its stable but attractive rates and currency components, and has been included in various global indices. But the onshore CNY credit market, which has still low foreign participation, has so far only attracted investor curiosity rather than real money. The onshore CNY credit market has a quasi government-like behavior due to a non-negligible amount of state-owned enterprises (SOEs), and typically acts as a restrainer for downside / default risk potential while still offering a 80 to 100bps pick up vis-a-vis its sovereign counterparts. 

In addition to the getting-popular onshore CNY government bond market and the less developed onshore CNY credit market, China also offers a well-represented and benchmark-aware investible dollar credit universe through JPM JACI (J.P. Morgan Asia Credit Index Core) or CEMBI (J.P. Morgan CEMBI Broad Diversified Core Index), which better satisfies the need of global institutional investors. China USD credit currently has a BBB+ rating and offers a c.a. 290bps spread over US treasury, which is well supported by the country’s economy and is a sweet spot when compared to other regional credit peers as both the rating quality (vs EM peers) and the spread compensation (vs DM peers) are substantially higher. 


Francoise Huang
Allianz Trade
Jordi Basco Carrera
Allianz SE