Coronavirus Impacts on China Fixed Income Market: Gordon Ip
The coronavirus is spreading beyond China’s borders. While the risks of the viral outbreak still underlie the financial market, we would like to discuss the impacts on China’s economy and investment implications for the upcoming quarters.
Business capacity suspension topped 80% of the normal level as part of PRC authorities’ effort to containing the outbreak. Although more workers are seen resuming their duties, industries such as automobile, electronics and consumer products get clobbered in practical terms during the first quarter.
Dealing with downward pressure, authorities are expected to appropriately expand fiscal and monetary measures to stabilize the economy, so adverse impacts on the credit market will be minimal. Global central bankers also prepared additional liquidity when needed. Ample liquidity will principally support market technical while investors continue to desire yields.
In China, some companies demonstrate agility and creativity. Measures are in place among factories to switch production to less-affected areas. Some property developers decided to launch digital sales campaign with discounts to reach out to people who prefer staying home.
We expect soft quarterly contract sales and delay in project launches. That said, January and February are traditional quiet seasons for China’s property sales. Less robust figures may partially be caused by seasonality. Moreover, it is also important to note that the viral outbreak is a one-off event. In fundamental terms, loss in contract sales are recoverable as long as the disruptions inflicted by the outbreak do not turn into a long-term risk.
Among the USD bond issues, we do not expect a large-sized shortfall in saleable resources, thus supporting a mild growth in annual contract sales. This is because most developers own a diversified land portfolio. Also, Hubei Provence, where Wuhan is located, typically accounts for single-digit percentage in total gross floor area.
From the liquidity perspective, developers likely remain financially prudent to preserve company’s liquidity. As a result, land purchase activities will slow down.
Refinancing risk is low due to decent liquidity profile in general and minimal near-term refinancing needs. As 2020 begins, more than US$17 billion worth of bonds have been issued. Sufficiently, at least 74% of refinancing needs could be covered for the year. Assessing the current situation, we expect credit metrics to remain manageable unless the consequences of the outbreak become inimical to growth for an unreasonably long duration, which is not in our base case assumption.
Automobile & Car Rental
The centre of the outbreak Hubei Province is a vital town for the nation’s automobile manufacturing. The entire production line has slowed, challenging this quarter’s production volume, domestic demand and export.
While auto sales in China is estimated to see a double-digit dip, car makers on the mainland may face refinancing challenges. There will also be a high chance that Chinese government will provide stimulus to help the industry in the area of electric car, number of license plates, etc.
The car rental industry is hit by varying levels of restriction on citizen’s mobility. Cash flow of these companies can be managed by reducing capital expenditure, disposing used cars at a deeper discount or raising loans and other forms of borrowing. In our view, liquidity should be stable in the following 12 months.
Macau casinos experienced a two-week closure and are only reopened to a limited extent. The closure scheme places a slight negative impact on their credit metrics. The earnings during the first and possibly the second quarter will likely suffer, potentially lifting short-term leverage. In our view, the overall impact is manageable and liquidity condition remains decent. Most casino operators have adequate cash on hand or debt funding capacity to navigate the short-term headwind.
The author is Gordon Ip, Chief Investment Officer – Fixed Income, Value Partners
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