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00:00Focus then on that assumption or at least that understanding from you. Around the end potentially of too big to fail here in China. What is going on there. How is the calculation for regulators in China changed and what the implications then for investors. Yes we think from 2016 to now China has been embarking on a credit cleanup trend. So this is after a very large credit boom post the global financial crisis. So as a result of that we've seen the number of defaults increase both in the dollar space and in the R and B space. And it includes larger companies defaulting nowadays. Also has seen some SUV state owned enterprises defaulting increasingly in the last few years as well as different sectors in real estate sector. We've also seen stresses being introduced into the financial sector. So we think if you take all of that and a whole is quite a clear indication that the notion of too big to fail may not apply anymore. And also the implicit government support on many of the borrowers in China have also clearly weighed. Have investors started to change their behavior on the back of this or are we still in the early stages of investors reallocating to take this reality into consideration. There's definitely been a very clear repricing and we look at this as a repricing of tail risk. So if you look at for example where on an index level double A single A triple B and double B corporates have had price so far this year spreads are tighter by somewhere between 10 to 20 basis points. However if you look at where single B corporates price they have widened by over 300 basis points year today. So there is a very clear underperformance amongst the really riskier side of the credit markets. And within that the biggest driver by far has been from China corporates and within that the property sector. So investors clearly have shifted in terms of how they are looking at riskier credits. Our view is that we think you'll take a little bit more time in order for investors to focus on valuation. We think in the near term certainly the focus continues to be on loss avoidance and on some of these idiosyncratic default risk. And looking ahead we're really looking more towards the first half earnings to get a little bit more guidance. And kind of is interesting your note to me waning implicit guarantees doesn't mean that there's no government support. So for an investor how can one actually determine which companies actually get that government support and when they're actually going to be reducing that moral hazard. Quite a difficult question to answer. Our view has consistently been that we're only comfortable assigning implicit government support to entities that we think have systemic or strategic importance. And aside from that we would prefer to rely on underlying credit fundamentals. But in terms of that strength of the support I think you raise a good point which is we think that the likelihood of government doing full bailouts are a lot less nowadays than before but it doesn't mean that there is no support. And last couple of years we've seen how government entities have injected capital into some of the small banks to shore up the balance sheets. We've also seen some of the government entities supplying liquidity to some corporates as well. So overall we do think that policymakers have tools available in order for them to support the market to prevent any kind of broad contagion risk. Beyond the property sector are you looking at certain borrowers that might be more at risk as well. So we think that if you look at it from a broad macro perspective China's non-financial debt to GDP was to eighty five percent end of last year we think we'll end the year slightly lower. And so leverage broadly stable. However within that kind of construct policymakers are continuing to crack down on credit and deal with some of the past excessive credit growth. And we see three areas that policymakers are in particular cracking down on. So no one is real estate. We've seen the introduction of the three red line policies looking to control property developer leverage. We've also seen banks having caps imposed in terms of the lending to that sector. The second area is local government indebtedness. And that's quite clear from many of the policy statements that's come through in the last few months. And within that there is a clear indication that they would like to reduce and handle some of that implicit debt amongst the local government entities like these local government financing vehicles. And then the third area is shadow banking. Now shadow banking is an area that's been getting a lot of focus in the last few years. And we think this continues to be a focus for policymakers in 2021.

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China Is on a Credit Cleanup Trend: Goldman’s Ho

Kenneth Ho, head of Asia credit strategy at Goldman Sachs Group Inc., discusses China’s credit markets, defaults and his outlook for the market. He speaks on “Bloomberg Markets: China Open.” (Source: Bloomberg)

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