ABRDN INCOME CREDIT STRATEGIES FUND Evergrande Note
September 2021
The situation within the Chinese real estate sector is fluid, with property developer Evergrande at the epicenter. While we expect a restructuring of Evergrande, we believe that this will proceed in a more orderly manner than the market currently fears. Risk aversion is extreme, with the market pricing in a default rate of approximately 30% (in addition to Evergrande). We feel that this is an opportunity for investors to look past near-term volatility and uncertainty.
We see limited risks of financial contagion impacting global markets from an Evergrande default in China. The financial exposure to Evergrande debt and equity is predominantly held within China, making it a domestic issue. Even China's offshore bond market is unique in that domestic investors account for nearly 90% of the holdings of the U.S. dollar-denominated bonds issued by Chinese companies.
We think that the financial contagion scenario is unlikely. The objective of the policies which have caused the Evergrande situation are to improve the financial stability of the property sector because it is so important to China's economy. Ninety percent of Chinese families own property, which accounts for 70% of their household wealth.
Chinese property development comprises as much as 30% of China's GDP and, significantly, developer land-buying accounts for about 30% of revenues for local governments. The Chinese government is a proponent of maintaining social and financial stability; therefore, it would require either a policy error or reversal to allow a downside scenario to develop without government intervention.
It is important to remember that defaults and credit losses are the result of a policy shift in 2018 and thus, are new phenomena for Chinese investors. Risk aversion is now extreme, and China B bonds offer an average spread of 1700 bps above comparable- duration U.S. Treasuries, which implies a roughly 30% default rate (in addition to Evergrande). By comparison, most international markets are at the upper ends of their valuations. In our view, the current environment is an opportunity for investors to look past near-term volatility and uncertainty and add exposure to stronger Chinese companies.
As of August 31, 2021, Aberdeen U.S. Closed-end funds have only minimal (less than 1%) or no exposure to Evergrande.
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Aberdeen Income Credit Strategies Fund published this content on 22 October 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 October 2021 07:45:01 UTC.
