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Goldman Sachs Likes High-Quality China Debt Amid Outflow Concern

  • Firm says biggest concern is a weaker yuan sparking outflows
  • While hawkish Fed a risk, says June rate hike odds below 50%

Higher-quality investment-grade Chinese bonds are a better investment than riskier debt amid concerns that a weaker renminbi will lead to rising capital outflows from the nation, according to Goldman Sachs Group Inc.  

Chinese data suggest capital outflow eased to $15 billion in April, an “encouraging” slowdown, analysts Kenneth Ho, Yang Yang and Charles Himmelberg at the bank wrote in a May 20 report. Still, the leakage could pick up again if the recent strength in the U.S. currency persists, they said.

“Our biggest concern is a weaker renminbi leading to rising China capital outflows, and a more hawkish Fed could see such risk resurface,” the analysts said. Goldman Sachs forecasts the yuan to weaken to 6.60 by year end, the report shows. The currency traded at 6.5475 per dollar in Shanghai on Monday.

The yuan completed a third week of declines last week, the longest stretch of losses since December. While China’s foreign-exchange reserves climbed by a total of more than $17 billion in March and April this year to $3.22 trillion, they only recouped part of the $323 billion outflow in the preceding four months, according to official statistics.

To be sure, the dollar retreated against all of its major counterparts Monday as traders weighed the likelihood that the Federal Reserve will raise interest rates next month. Goldman Sachs sees a less than 50 percent chance for the Fed to hike interest rates in June, the report shows.

The investment bank sees the pick-up in defaults in China as likely to be a long cycle and expects the impact to be increasingly felt in the offshore credit market. The firm favors Indonesia quasi-sovereign notes among Asian high-grade bonds and shorter-dated BB rated notes among high-yield securities.

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