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Matt Jones

Welcome to Idea Jeneration with Stephen Jen, a podcast series offering insights into long-term themes within global markets.

This is a production of Eurizon SLJ Capital, and has been recorded for professional investors. My name is Matt Jones, Head of Distribution for Eurizon SLJ Capital.

In this episode, we ask Stephen whether defaults within the China onshore bond market could, in fact, be a good thing.

Stephen Jen

Until recently, the Chinese markets had a pretty major problem of not having had enough defaults. There's a natural level of defaults that should happen as companies fail; it's like a creative destruction process. That's pretty natural around the world; it's not a weakness for the country.

From a macro perspective, the Chinese economy has a very powerful, robust growth trend of the baseline demand. So companies should do well and the cost of capital is low relative to nominal GDP growth. But they are companies that over levered themselves and have problems.

In the past - until, I would say, two years ago - there had been such a strong sense of implicit guarantee that the government was providing, that if any company had problems with servicing their debt, the government would come in and rescue the company. That did happen, for a while. And the rescue operations in turn gave the market the false impression that everybody was safe, nobody would be allowed to default, which created the opposite problem of artificial credit spread compression, much like what's happening in Europe. In Europe, the governments, the ECB is doing exactly that, trying to artificially compress the credit spread. In China, they used to do this, but now they don't want to do this anymore. They want the credit market to have a wide enough spread of credit yields so that they properly reflect the underlying risk of the issuer.

Is this healthy or not healthy? In my view, it's a self-imposed stress test, these credit events, and I think in the long run it's positive. Maybe in the short run, it's not too comfortable with people who hold these names. But we're hoping that this continues so that we have a broader array of papers to choose from.

Matt Jones

Further information can be found within the episode description, and more insights are available at

The views expressed within this podcast were accurate as at the time of publication. Opinions expressed by the speakers are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.


Audio taken from Eurizon SLJ's webinar China Onshore Bonds - A New Safe-Haven Asset?, recorded on 25th March 2021


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Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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