Rising corporate defaults and market interest rates in China may not be all bad news and may be beneficial in the long term, says AllianceBernstein (AB).
In its Fixed Income Insights report, AB said one of the reasons yields have risen so sharply is that they are coming off a low base, created late last year when disappointing growth figures led investors to assume that China’s central bank would cut interest rates.
AB’s Asian sovereign strategist Anthony Chan said many global investors and commentators outside China tend to interpret the country’s economic data in isolation from other factors, which can lead to overreaction.
“It helps to remember that China is rebalancing its economy from a model that was driven largely by heavy industry and exports to one in which consumption and services will play a bigger role,” Mr Chan said.
“This should lead to more sustainable growth, but growth that will be lower than the double digit annual expansion that China experienced during its boom years as the world’s factory.”
Regarding rising corporate defaults, AB’s portfolio manager for Asian credit, Jenny Zeng, said it is possible to view it as a positive for China’s reform program, aimed at delivering microeconomic reforms to assist in rebalancing.
“In the more open, market-driven economy that China is trying to create, it will be important for insolvent companies to be allowed to fail, as government support for such companies would effectively reward inefficiencies and prevent capital from being allocated rationally,” Ms Zeng said.