China Top Fund May Cut Corporate Bond Exposure as Defaults Surge

  • Bosera's Wei Zhen says may focus on high-grade notes
  • Wave of onshore debt defaults has prompted rise in yields

China’s top fixed-income fund manager said she may cut holdings of onshore corporate notes after defaults surged in the world’s third-biggest debt market.

Rising credit risks may lead to a further correction in corporate bonds as there’s likely to be a wave of rating downgrades mid-year, said Wei Zhen, a fund manager at Bosera Asset Management Co. in Shenzhen. Wei oversees the Bosera Anfeng 18-Month Interval Bond Fund, which has returned 17 percent in the past year, ranking it first among all fixed-income funds tracked by research firm Howbuy.

“We may moderately lower exposure to corporate bonds and focus on high-graded bonds or bonds with medium-to-short durations,” Wei said. “We may cut leverage moderately.”

A series of defaults this year has triggered the biggest selloff in onshore junk bonds since 2014 and driven up financing costs for companies. Local issuers have canceled 78.3 billion yuan ($12.1 billion) of security sales in April alone after at least seven firms missed local note payments this year, already reaching the tally for the whole of 2015.

Premiums Rises

The yield premium of three-year AA- rated corporate bonds over similar-maturity government notes has widened a total of 30 basis points in March and April to 354 basis points, set for the biggest two-month increase since 2014, according to Chinabond data.

While Wei is looking at reducing her corporate bond exposure, she doesn’t think there will be “a big correction in the corporate bond market unless continuous and large-scale defaults trigger a liquidity crisis in the financial system. The probability of such systemic risks is very low given regulators’ good care for the market.”

Bosera is also raising money for its new Bosera Anrun 18-month Interval Bond fund, which will also focus on fixed-income investments.

— With assistance by Judy Chen

Before it's here, it's on the Bloomberg Terminal.