China Bond Fund With 14% Gain Says Turn of Stocks to Shine

  • Soochow Fund says risk appetite to improve as stimulus working
  • ‘Funds may flow into stocks from bond market,’ Yang, Chen say

The best-performing bond fund in China -- which gained 14 percent in the past year -- said government economic stimulus means money may flow from onshore corporate debt into stocks.

Policy makers could focus more on stimulating aggregate demand in the short-term, drawing money away from fixed-income assets and toward riskier equities, said Yang Qingding and Chen Chen, fund managers of Soochow Dingli Bond Fund. They see that pushing up company yields and widening their spread over sovereign securities. The premium on five-year AA rated bonds narrowed 47 basis points this quarter to a record-low 115 basis points on Aug. 19.

“Risk appetite may improve even further after a period of time, which will help increase demand for equities and cut demand for fixed-income assets,” Shanghai-based Yang and Chen at Soochow Asset Management Co. said in an e-mail interview. The fund, which oversees 13 billion yuan ($2 billion), was ranked No. 1 among peers by research firm Howbuy.

The Shanghai Composite Index has rebounded 16 percent from a one-year low in January, helped by a stabilizing currency and some signs of a rebound in the world’s second-largest economy. The government said this month it plans to issue a three-year plan for boosting growth in the hard-hit northeastern rustbelt provinces. Morgan Stanley wrote in an Aug. 20 note there could be a "powerful" catchup rally in Chinese stocks as earnings estimates have been revised higher in the past month and global investors are again targeting emerging markets.

The earnings yield for the Shanghai equities gauge is 2.33 percentage points higher than the 10-year AAA corporate yield, up from 1.50 at the end of last year, increasing the appeal of investing in shares. Bargain hunters may still find targets as China’s benchmark equity index remains down 13 percent this year even after its recent rally. That lags the 2.6 percent return in the BofA Merrill Lynch China Corporate Index of bonds.

There have been positive signs for stocks in recent data. China equity funds ended a nine-week outflow streak in the five days through Aug. 17, according to EPFR Global.

Credit Risks 

Citic Securities Co., the nation’s biggest brokerage, warned of a bond correction in the short term after a plan to link the Hong Kong and Shenzhen stock exchanges spurred a rally in mainland shares.

There are also signs that recent economic bright spots haven’t yet translated into stronger corporate finances. The number of firms listed in Shanghai and Shenzhen that had a net annual loss with negative revenue growth and not enough cash to cover short-term debt has grown to 184, based on the latest filings compiled by Bloomberg, from 107 a year ago.

Chinese investors have historically been able to afford downplaying such credit risks, as there have been only 26 local yuan bond defaults since the market started in 1981. But that may be set to change.

“The market will pay more attention to bond issuers’ credit profiles,” said Yang and Chen.

A record 88 bond issuer ratings were cut in the first half, compared with 57 downgrades a year earlier, according to data compiled by Bloomberg from Dagong Global Credit Rating Co., Shanghai Brilliance Credit Rating & Investors Service Co., China Chengxin International Credit Rating Co. and China Lianhe Credit Rating Co.

“We don’t see any value in the onshore corporate bond market in China with credit spreads at a very low level,” said Ken Hu, chief investment officer of Asia fixed income at Invesco Hong Kong Ltd.

— With assistance by Judy Chen, Lianting Tu, and David Yong

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