WEBVTT - How Bond Defaults Are Changing China's Markets 0:00:10.680 --> 0:00:14.280 Hello, and welcome to another episode of the Odd Loots Podcast. 0:00:14.400 --> 0:00:19.319 I'm Tracy Allaway and I'm Joe. Wasn't so Joe? You know, 0:00:19.360 --> 0:00:23.200 I just came back from Beijing, yes, and uh, we 0:00:23.239 --> 0:00:25.440 haven't even talked about it yet, but I saw all 0:00:25.520 --> 0:00:30.360 of your pictures and I'm extremely jealous. Yeah, the food 0:00:30.480 --> 0:00:33.280 was very good, and you should be jealous because you 0:00:33.320 --> 0:00:35.519 missed out on quite a lot. But you know, I 0:00:35.600 --> 0:00:38.440 thought you had some lamb thing, like a big, like 0:00:38.520 --> 0:00:41.239 gigantic barbecued lamb that just looked like the best thing 0:00:41.280 --> 0:00:44.080 I've ever seen? Is that? Right? It was so good, 0:00:44.280 --> 0:00:47.440 it was amazing. It was like a Mongolian barbecued leg 0:00:47.600 --> 0:00:50.720 of lamb that you grill at your own little table 0:00:50.760 --> 0:00:54.000 and then you dip it into crushed peanuts and salt, 0:00:54.080 --> 0:00:57.800 and it was good. I'm allergic to peanuts, but what 0:00:57.880 --> 0:01:02.000 everything else sounded amazing? All right, Well, next time you come, 0:01:02.200 --> 0:01:04.920 we will have that without the peanuts. But you know, 0:01:04.959 --> 0:01:08.160 I hadn't been back to Beijing for like thirteen or 0:01:08.240 --> 0:01:12.800 fourteen years, and there were so many changes to the city, 0:01:12.959 --> 0:01:15.520 like really big ones. Whole areas of it are just 0:01:15.760 --> 0:01:18.880 unrecognizable to what they look like in two thousand five, 0:01:18.920 --> 0:01:22.160 two thousand and six. I feel like we should do 0:01:22.200 --> 0:01:25.160 a whole episode at some point, just like you comparing 0:01:25.720 --> 0:01:28.280 Beijing over thirteen years. I bet people would be interested 0:01:28.319 --> 0:01:31.680 in that. I don't think I was as um financially 0:01:31.720 --> 0:01:34.600 minded back in two thousand five and two thousand six, 0:01:34.640 --> 0:01:37.000 but I was going to say, one of the biggest 0:01:37.080 --> 0:01:41.120 changes in that time period has of course been to 0:01:41.480 --> 0:01:45.600 China's capital markets. So thirteen years ago, China didn't really 0:01:45.640 --> 0:01:48.240 have much of a corporate bond market, and now it 0:01:48.280 --> 0:01:52.120 has a pretty big one, both domestically and dollar denominated 0:01:52.160 --> 0:01:56.480 off to our bonds as well. But most importantly, China's 0:01:56.520 --> 0:02:00.160 corporate bond market has had a number of defaults in 0:02:00.240 --> 0:02:04.640 recent years, and that's a really big change because historically, 0:02:05.000 --> 0:02:07.960 you know, it was kind of uncertain that the authorities 0:02:07.960 --> 0:02:11.840 in China would allow companies to default. So you can imagine, Joe, 0:02:13.040 --> 0:02:15.480 that makes for an interesting bond market, given that bonds 0:02:15.520 --> 0:02:20.560 are of course supposed to reflect investors perception of default risk. Yeah. 0:02:20.600 --> 0:02:24.280 I remember, like, I guess what was at or the 0:02:24.360 --> 0:02:29.120 first ever Chinese bond default, And I remember thinking like, 0:02:29.200 --> 0:02:31.840 how is this possible? Like how could you have the 0:02:31.960 --> 0:02:34.600 first ever bond default. And I almost like thought I 0:02:34.680 --> 0:02:37.480 was misreading the article, is this idea that there had 0:02:37.560 --> 0:02:41.080 never been a defaulted bond before? But obviously, you know, 0:02:41.120 --> 0:02:43.840 we sort of take for granted the maturity of the 0:02:43.960 --> 0:02:46.839 US bond market, the US corporate bond market, and then 0:02:47.080 --> 0:02:49.919 defaults even in good times, you know, they happened from 0:02:49.919 --> 0:02:53.480 time to time with low rated companies. We sorry take 0:02:53.520 --> 0:02:57.120 for granted that not all markets are as a mature 0:02:57.520 --> 0:03:02.480 and sort of market regulated the way the US one is. Yeah, totally. 0:03:02.520 --> 0:03:04.760 And I mean I remember in two thousand and fifteen, 0:03:05.320 --> 0:03:08.120 analysts over at Bank of America Marylanch they published a 0:03:08.200 --> 0:03:12.560 note that was basically a history of Chinese corporate bond defaults, 0:03:12.600 --> 0:03:15.160 and there were like two things on there. It was. 0:03:15.320 --> 0:03:17.520 It was a pretty short note, as you might imagine, 0:03:17.760 --> 0:03:21.440 but it raises all these interesting questions about how do 0:03:21.440 --> 0:03:25.480 you actually develop a corporate bond market almost from scratch, 0:03:25.840 --> 0:03:31.880 and what sort of distortions or unique characteristics are introduced 0:03:31.960 --> 0:03:34.760 when you have a big question mark over whether or 0:03:34.760 --> 0:03:37.160 not defaults will be allowed. And I should just say 0:03:37.760 --> 0:03:42.000 one of the defining features of China's sort of business 0:03:42.120 --> 0:03:46.720 system as a whole is the division between private companies 0:03:47.120 --> 0:03:50.920 and state owned enterprises. So s O es uh, these 0:03:50.960 --> 0:03:54.680 big state run conglomerates that are often thought to be 0:03:55.040 --> 0:04:00.400 government backed or even government guaranteed. Right, Well, I'm interested 0:04:00.440 --> 0:04:03.680 in learning more about this topic alright. So we actually 0:04:03.720 --> 0:04:06.400 have the perfect guest to talk about all of this. 0:04:06.760 --> 0:04:09.600 It's someone who's done a lot of academic work on 0:04:09.680 --> 0:04:12.600 exactly this topic, as well as a lot of other stuff. 0:04:13.040 --> 0:04:16.360 It's Juin Pan. She is a professor at the Shanghai 0:04:16.440 --> 0:04:21.400 Advanced Institute of Finance at Shanghai Jiaotong University. So, June, 0:04:21.480 --> 0:04:24.080 thank you so much for coming on. Well, thank you 0:04:24.120 --> 0:04:28.200 so much for the invitation. It's exciting to hear what 0:04:28.200 --> 0:04:31.280 what do you and Joe just talked about it. It's 0:04:31.320 --> 0:04:35.640 really an interesting topic for me at the moment. Right. So, 0:04:35.720 --> 0:04:39.000 you actually just published a paper where you were looking 0:04:39.160 --> 0:04:42.880 at this exact topic, and specifically you were looking at 0:04:42.920 --> 0:04:46.960 whether or not spreads or risk premiums on China's corporate 0:04:47.000 --> 0:04:51.400 bonds actually reflect the health the financial health of its companies. 0:04:51.440 --> 0:04:54.520 But before we dive into that, um, I wanted to 0:04:54.560 --> 0:04:59.320 sort of ask you a broader question about how China's 0:04:59.360 --> 0:05:03.200 financial mark as are currently structured, So corporate bonds are 0:05:03.360 --> 0:05:08.560 supposed to be market based versus the sort of traditional 0:05:08.760 --> 0:05:12.760 bank based system of lending in China. And what I 0:05:12.760 --> 0:05:16.320 mean by market based is investors are setting or influencing 0:05:16.360 --> 0:05:20.000 funding costs by demanding a certain level of compensation for 0:05:20.080 --> 0:05:24.080 perceived risk. So how big of a leap was it 0:05:24.200 --> 0:05:26.880 or is it for China to move from that bank 0:05:26.920 --> 0:05:30.680 based system of lending to something that incorporates more market 0:05:30.760 --> 0:05:34.599 based types of lending. I would say it's a it's 0:05:34.600 --> 0:05:37.800 a big leap for people like myself who works in 0:05:37.839 --> 0:05:41.520 a in a financial research area, in a financial market. 0:05:41.680 --> 0:05:46.680 This is a very encouraging development to see that China's 0:05:46.720 --> 0:05:51.479 credit market overall, the credit market to be improving. Actually, 0:05:51.520 --> 0:05:56.479 the speed of the market development was pretty impressive over 0:05:56.520 --> 0:06:00.200 the past ten years. It grew into a roughly a 0:06:00.279 --> 0:06:03.720 street trailing US dollar market, So it has been a 0:06:03.760 --> 0:06:08.960 pretty impressive development just to the credit market alone. So 0:06:09.160 --> 0:06:13.120 sorry break it down. What is the split between how 0:06:13.240 --> 0:06:17.600 much private credit is funded via something we'd recognize as 0:06:17.600 --> 0:06:22.520 the bond market versus traditional bank lending. So if you 0:06:22.600 --> 0:06:25.560 think about the ratio for non financial firms in China, 0:06:25.839 --> 0:06:28.919 so we have a ratio of for market based debt, 0:06:29.360 --> 0:06:34.600 so including copper bounds and also other type of basically 0:06:35.000 --> 0:06:39.599 market traded versus bank loans. In two thousand eight it 0:06:39.760 --> 0:06:43.800 was about four point six percent, so only a tiny 0:06:43.880 --> 0:06:48.080 fraction as a racial too to the bank loads. You know, 0:06:48.240 --> 0:06:53.320 China's financial system is still a bank dominated uh system, 0:06:53.520 --> 0:06:56.800 not not like in the US. So that number grew 0:06:56.920 --> 0:07:01.039 from four point six in two thousand and eight a 0:07:01.080 --> 0:07:06.480 little bit under to be more precise, in two thousand eighteen, 0:07:06.920 --> 0:07:11.640 and much of that improvement is driven by the corporate 0:07:12.120 --> 0:07:17.960 the credit market. So walk us through your most recent paper. 0:07:18.160 --> 0:07:22.200 So you're you're taking a deep dive into Chinese corporate 0:07:22.200 --> 0:07:25.400 bonds and you're trying to ascertain whether or not the 0:07:25.480 --> 0:07:31.840 actual spreads, the risk premiums reflect something fundamental about the 0:07:31.880 --> 0:07:36.280 financial health of Chinese companies, as they sort of are 0:07:36.320 --> 0:07:39.360 meant to do in more developed markets. So you know, 0:07:39.400 --> 0:07:42.000 if a company is perceived to be at a higher 0:07:42.080 --> 0:07:46.520 risk of defaults, it'll have a higher spread because investors 0:07:46.520 --> 0:07:49.240 want to be compensated for that risk. Why did you 0:07:49.280 --> 0:07:52.559 decide to look into this particular topic in the US 0:07:52.640 --> 0:07:57.000 pocket this this question has been well researched, So you 0:07:57.080 --> 0:08:01.880 look at companies of different let's the different fundamental risk 0:08:02.080 --> 0:08:05.960 in terms of the faults. In academic we have standard 0:08:06.080 --> 0:08:09.920 models named after the professional button as we called the 0:08:10.000 --> 0:08:13.640 murder models. So in a mortor model, we take the 0:08:13.680 --> 0:08:18.200 firm's baton sheeting information including its leverage, and also we 0:08:18.320 --> 0:08:22.360 take the firms if the firm is traded with public 0:08:22.360 --> 0:08:26.440 playlisted equity, we take the equity market information and one 0:08:26.480 --> 0:08:30.680 of the key information will be the equity volatility. So 0:08:30.840 --> 0:08:34.760 the murder model will take those fundamental plus equity market 0:08:34.800 --> 0:08:39.120 information as input and give you an assessment of what's 0:08:39.120 --> 0:08:43.040 the probability of the fault for the bond issued by 0:08:43.080 --> 0:08:47.200 this company. And you can get a sense that there 0:08:47.240 --> 0:08:52.280 will be a connection between model predicted the faults and 0:08:52.720 --> 0:08:58.840 the market observed credit spreads. So in the US, if 0:08:58.880 --> 0:09:02.360 you take an approach of that, you will see that 0:09:02.960 --> 0:09:08.640 about of the variation in credit spread can be explained 0:09:08.679 --> 0:09:12.839 by fundamental So we take this as a starting point 0:09:12.920 --> 0:09:16.760 and we want to see whether in China we see 0:09:16.960 --> 0:09:21.880 a smiller direction in terms of fundamental house of the 0:09:21.960 --> 0:09:28.400 firm and the credit market pricing of the issuer. And 0:09:28.400 --> 0:09:31.880 and this is our studying point before we get to 0:09:32.040 --> 0:09:35.800 how well, the model works with the Chinese. Uh, with 0:09:35.880 --> 0:09:39.480 the Chinese bond market. I'm curious in the US, maybe 0:09:39.520 --> 0:09:42.640 just talk a little bit about you know, the US 0:09:42.720 --> 0:09:46.439 is probably close to the sort of ideal free market 0:09:46.960 --> 0:09:51.120 or free bond market. Is the Merten model robust enough 0:09:51.400 --> 0:09:55.400 such that one can use it to identify miss pricings 0:09:55.559 --> 0:09:59.720 or identify arbitrage opportunities between the price of a bond 0:10:00.000 --> 0:10:02.839 and the price of an equity. Because you said so, 0:10:02.880 --> 0:10:06.160 I'm sort of curious whether it's something that's mostly useful 0:10:06.320 --> 0:10:09.280 from just a pure theoretical perspective, or whether it can 0:10:09.360 --> 0:10:12.960 sort of form the basis for at least initially attempting 0:10:13.000 --> 0:10:17.720 to identify overvalued or undervalued bonds. Well, this is a 0:10:17.720 --> 0:10:21.720 good question. I mean, our financial models are always approxi 0:10:21.760 --> 0:10:26.640 mentions of the much much richer reality. But this model 0:10:26.679 --> 0:10:30.920 actually has been used by practitioners. There is uh you 0:10:31.000 --> 0:10:34.520 probably have heard of. It's called km V. Yeah, so 0:10:34.760 --> 0:10:38.000 km V was a it was a company that they 0:10:38.559 --> 0:10:43.560 exactly the mode model and see the model with the 0:10:43.559 --> 0:10:46.920 real data and the outcome is the problem. The km 0:10:47.000 --> 0:10:50.679 these distance to default measure, which is similar to the 0:10:50.760 --> 0:10:54.439 probability of default measure. I think for those listening who 0:10:54.440 --> 0:10:57.520 have terminals at home, we have a very good function 0:10:57.559 --> 0:11:02.600 on the terminal where you can and see your company's KMB. Yeah, 0:11:02.600 --> 0:11:04.920 I thought I had to uplug the terminal here, but 0:11:05.000 --> 0:11:07.040 you can. Actually it has the Merton model and you 0:11:07.040 --> 0:11:09.640 can change some of the assumptions and so it's very fun. 0:11:09.679 --> 0:11:12.480 You can sort of measure uh, you know, the gaps 0:11:12.520 --> 0:11:15.080 between the price of the CDs and distance to default. 0:11:15.080 --> 0:11:16.600 You can play around with that. It's very fun. And 0:11:16.800 --> 0:11:19.280 I didn't mean to interrupt your apologize for that. I 0:11:19.280 --> 0:11:23.120 would say this model it's not perfect. It's even the 0:11:23.120 --> 0:11:25.559 Black Show's option pricing for the lives a lot of 0:11:26.080 --> 0:11:29.840 you know, limitations, but it's a good starting point, a 0:11:29.880 --> 0:11:34.160 good reference point was to start with, and it's encouraging it. 0:11:34.200 --> 0:11:38.000 There is a link between the fundamental of the firm 0:11:38.160 --> 0:11:42.360 and how it's a bonus priced. And as you move 0:11:42.400 --> 0:11:45.320 on from the US market to the to the Chinese market, 0:11:45.320 --> 0:11:48.600 you know will be surprised or maybe not surprised to 0:11:48.720 --> 0:11:52.680 see that this meant actually should not be taken for granted, 0:11:53.400 --> 0:11:57.599 as we see in a in a data so imperfections 0:11:57.640 --> 0:12:01.720 in the Merton model aside, What did your research actually 0:12:01.800 --> 0:12:05.880 show for the Chinese credit market. Did spreads on China's 0:12:05.920 --> 0:12:09.480 corporate bonds actually show some sort of link to the 0:12:10.080 --> 0:12:14.000 fundamental health of companies or issuers? I mean, I guess 0:12:14.000 --> 0:12:16.800 another way of asking that question is is the market 0:12:16.840 --> 0:12:21.520 based system actually working in China? So this question has 0:12:22.400 --> 0:12:25.120 a know and then a yes. So the note is 0:12:25.200 --> 0:12:28.520 that the four two zousand fourteen, as as you and 0:12:28.559 --> 0:12:32.880 the Georges discussed, the four Tusan and fourteen bonds were 0:12:32.920 --> 0:12:36.559 not allowed to default, so they were zero deforet the 0:12:36.800 --> 0:12:39.520 prior two thousand and fourteen, so our data was from 0:12:39.920 --> 0:12:42.520 two thousand ten to two thousand fourteen, would call this 0:12:42.679 --> 0:12:46.719 the phase one period. During that period, there is no 0:12:46.880 --> 0:12:51.080 link fundamental and the credit spread. There is no link 0:12:51.600 --> 0:12:55.480 between those two. Why wasn't there this idea that they 0:12:55.520 --> 0:12:58.280 go there were like there was questions about whether default 0:12:58.320 --> 0:13:01.040 would ever be allowed to happen. What was the fear 0:13:01.080 --> 0:13:03.600 of there and what was sort of then driving the market? 0:13:03.679 --> 0:13:07.200 If there was this perception that defaults just weren't going 0:13:07.240 --> 0:13:10.320 to be a thing. Well, first, let me actually rephrase 0:13:10.440 --> 0:13:15.280 my previous statement. I should say conditioning on information in ratings, 0:13:15.440 --> 0:13:19.200 because China doesn't have rating agencies, so they do rate 0:13:19.640 --> 0:13:24.880 these different bonds, so conditioning on the ratings from fundamentals 0:13:24.920 --> 0:13:28.640 that have no uh, additional information, so there is no link. 0:13:29.320 --> 0:13:34.000 Is I do want to qualify my previous statement um 0:13:34.160 --> 0:13:37.240 in terms of why defaults was not allowed to happen. 0:13:37.520 --> 0:13:41.480 I guess this is not something it's difficult for me 0:13:41.640 --> 0:13:47.239 to speculate on the regulation regulators, right, But the observation 0:13:47.360 --> 0:13:52.840 from the market up participants is that these bonds never deflored. 0:13:53.400 --> 0:13:57.319 So there is the Chanese saying of bound market pricing 0:13:57.880 --> 0:14:02.920 face based do you down to this phase that bonds 0:14:02.960 --> 0:14:07.439 don't defer, So it doesn't really matter about risk compensation 0:14:07.679 --> 0:14:10.320 because the death's going to get bailed out anyway if 0:14:10.400 --> 0:14:13.319 it ever ran into trouble, and hence there's actually no 0:14:14.000 --> 0:14:19.080 differentiation shown in the risk premiums that is actually connected 0:14:19.200 --> 0:14:22.120 to the fundamental health of the company. But you said 0:14:22.520 --> 0:14:27.320 that was phase one, So what happened in phase two? Okay? 0:14:27.400 --> 0:14:31.120 So we start our phase two from from two thousand 0:14:31.240 --> 0:14:36.160 fourteen after the first default the front phase two to 0:14:37.360 --> 0:14:40.880 the first quarter of two thousand eighteen. So over that 0:14:41.040 --> 0:14:45.440 period you started to see a connection between the film 0:14:45.520 --> 0:14:51.440 fundamentals and equity marketing information and the what do you 0:14:51.520 --> 0:14:54.880 call the risk premium of the bonds all credit spreads 0:14:54.960 --> 0:14:57.880 of this spot the start to develop a link. The 0:14:58.000 --> 0:15:00.360 link is much weaker than what we've see in the 0:15:00.520 --> 0:15:04.000 US market, but this is from our aunt. It looks 0:15:04.040 --> 0:15:07.480 like a very promising beginning for the Chinese cap credit 0:15:07.640 --> 0:15:29.000 market in your recent paper, and Tracy mentioned this in 0:15:29.080 --> 0:15:32.520 the very beginning in the intro. Of course, the Chinese 0:15:32.840 --> 0:15:36.720 private sector, of the Chinese corporate market is still segmented 0:15:37.280 --> 0:15:42.720 massively between regular enterprises and state owned enterprises which are 0:15:42.800 --> 0:15:46.720 state controlled and state back to varying degrees. You also 0:15:46.920 --> 0:15:50.240 look at what the bond market says about the state 0:15:50.320 --> 0:15:53.360 owned s o E sector. What do you see are 0:15:53.440 --> 0:15:56.440 the differences in terms of how the bond market works 0:15:56.520 --> 0:16:00.640 for those s O s SO doing place one which 0:16:00.760 --> 0:16:03.800 is prior to the default. There is not too much 0:16:03.920 --> 0:16:08.840 differentiation between these two groups. Overall. We do see that 0:16:09.200 --> 0:16:14.120 a s A HE this government sponsored enterprise, the s 0:16:14.160 --> 0:16:18.480 as our states on the enterprise, you know, depending on 0:16:18.560 --> 0:16:21.520 how you call them, let's just call them as as SO. 0:16:22.120 --> 0:16:24.920 During phase one as HE does have a little bit 0:16:25.040 --> 0:16:28.480 of a premium, meaning that their credit spreads a narrower 0:16:29.040 --> 0:16:33.720 compared to the non ass aly counterparts. Was similar ratings 0:16:34.360 --> 0:16:37.520 during phase two. If you remember face towards the time 0:16:38.400 --> 0:16:42.280 from two southern fourteen to eighteen where we started to 0:16:42.360 --> 0:16:45.520 see the faults, but the defaults happened during that time 0:16:45.680 --> 0:16:49.800 was mostly too to the non listed firms. So if 0:16:49.880 --> 0:16:54.480 you focus on the listed firms, meaning that these firms 0:16:54.600 --> 0:16:58.280 usually are larger firms in the economy, then the difference 0:16:58.400 --> 0:17:01.960 between s and now as so as do a pretty 0:17:02.680 --> 0:17:05.960 mild mild in the sense that during phase three later 0:17:06.040 --> 0:17:10.000 on they become explosive, but during phase two there was 0:17:10.119 --> 0:17:14.040 two about twenty basis point in terms of difference in 0:17:14.119 --> 0:17:18.520 the credit spread. Let me repherence the the s AY 0:17:19.119 --> 0:17:25.000 issues enjoy about a twenty basis point narrower credit spread 0:17:25.400 --> 0:17:30.639 compared to that they are not necessarily counterpart. So the 0:17:30.760 --> 0:17:35.240 implicit guarantee seems uh to be very much alive for 0:17:35.440 --> 0:17:38.760 these state owned enterprises, and so they have these lower 0:17:38.840 --> 0:17:42.639 risk premiums, which means they can attract financing at a 0:17:42.760 --> 0:17:47.840 lower cost than private companies. I'm wondering do you have 0:17:47.960 --> 0:17:53.680 any thoughts or insights into how the Chinese authorities might 0:17:53.760 --> 0:17:58.520 be viewing that discrepancy or that segmentation in the market, Like, 0:17:59.200 --> 0:18:02.680 is there a desire to put private companies on a 0:18:02.760 --> 0:18:08.040 more even funding footing? So to speak with s O 0:18:08.119 --> 0:18:12.000 E S is that something that China wants? If it 0:18:12.119 --> 0:18:15.679 may I complete the whole picture before I talk about 0:18:15.840 --> 0:18:21.480 what UH policies implications. So prior to two thousand eighteen, 0:18:21.800 --> 0:18:24.600 So so so far we have two phases. One is 0:18:24.720 --> 0:18:27.640 pretty fault, one is posted fought. But up to two 0:18:27.640 --> 0:18:30.560 thousand and eighteen, if you look at the data, the 0:18:30.720 --> 0:18:34.879 difference between SZE and ANE is mild. It's about twenty 0:18:34.960 --> 0:18:38.560 basis point of a premium for the s E. But 0:18:38.840 --> 0:18:43.959 going into two thousand eighteen, this is when the credit 0:18:44.080 --> 0:18:48.640 market went crazy. This is so there are different regulations. 0:18:49.119 --> 0:18:52.920 Even prior to to thousand eighteen. There was a de 0:18:53.160 --> 0:18:57.639 leveraging campaign that started in two thousand and seventeen. So 0:18:58.160 --> 0:19:03.639 gradually the credit market is was affected by by the regulations. 0:19:04.400 --> 0:19:07.840 Especially in two thousand and eighteen, there was a what 0:19:08.000 --> 0:19:11.840 they called the st management New regulations are as a 0:19:11.960 --> 0:19:17.160 management which kind of cut the funding or the from 0:19:17.200 --> 0:19:22.120 the st manager site cut their holdings of the credits bounds. 0:19:22.680 --> 0:19:27.119 UH put it another way and makes them more discriminating 0:19:27.240 --> 0:19:31.200 against the USA. That makes them more aware of the 0:19:31.320 --> 0:19:35.440 credit rest even more so than before. So this is 0:19:35.520 --> 0:19:40.800 the time when the segmentation becomes very severe. So the 0:19:40.920 --> 0:19:45.760 Twente basis point premium enjoyed by the stories exploded to 0:19:45.840 --> 0:19:50.160 about hundred basis points. Prior, the segmentation between these two 0:19:50.240 --> 0:19:54.600 markets were was not so severe. Then post two thousand 0:19:54.600 --> 0:19:58.480 and eighteen it became a really big deal. And along 0:19:58.560 --> 0:20:01.480 the same time do you see starting to see a 0:20:01.560 --> 0:20:05.680 lot more efforts for the bias or eu frons. So 0:20:05.920 --> 0:20:08.760 it sounds like just listening to you so far as 0:20:08.840 --> 0:20:12.920 you identify these three phases. So there was the pre 0:20:13.080 --> 0:20:18.360 default phase going up to everyone enjoyed pretty tight spreads. 0:20:18.400 --> 0:20:22.040 The bond market didn't tell you very much. Post fourteen 0:20:22.280 --> 0:20:26.080 you start to get slightly more wider spreads for the 0:20:26.359 --> 0:20:31.119 private non s O companies and more information from the 0:20:31.720 --> 0:20:35.399 UM bond market period. They the prices start being more informative. 0:20:35.880 --> 0:20:40.399 Post eighteen, the spreads get even wider. And in this 0:20:40.640 --> 0:20:45.359 phase this is due to asset managers being forced to 0:20:45.400 --> 0:20:48.520 be more cognizant about credit risk. It sounds like a 0:20:48.680 --> 0:20:53.639 sort of just an ongoing maturation process. There was a story, 0:20:53.880 --> 0:20:57.840 and Tracy alerted it to me this morning that actually 0:20:57.960 --> 0:21:01.240 there is there is an s OE now that it's 0:21:01.520 --> 0:21:04.560 very close, if not near in default or some sort 0:21:04.600 --> 0:21:07.000 of bond holders are going to have to take a haircut. 0:21:07.359 --> 0:21:11.040 Are we on the verge of a new stage four 0:21:11.160 --> 0:21:14.600 or phase four whereby the bond market will start to 0:21:14.800 --> 0:21:18.920 be more meaningful for also the s O sector, the 0:21:19.040 --> 0:21:24.200 private sees you see them, you actually see private listed. 0:21:24.560 --> 0:21:28.399 When I say private, I mean s O E issuers 0:21:29.119 --> 0:21:33.800 who do not have a publicly listed So for this group, 0:21:34.720 --> 0:21:38.119 we we actually have sent the faults amount this group. 0:21:39.320 --> 0:21:42.679 I want to go back to uh my, my earlier question, 0:21:42.760 --> 0:21:46.240 which was about whether or not it's desirable for the 0:21:46.400 --> 0:21:51.159 private companies to be on a similar funding um playing 0:21:51.320 --> 0:21:55.440 field as the s O s because of course, in 0:21:55.680 --> 0:21:58.040 order for that to happen, I guess you you do 0:21:58.280 --> 0:22:02.639 need to introduce some sort of default risk into the 0:22:02.840 --> 0:22:06.240 state owned enterprise sector or you have to eliminate it 0:22:06.359 --> 0:22:09.880 in the private market, which doesn't seem to be um 0:22:10.080 --> 0:22:14.040 what China wants at the moment. So is leveling the 0:22:14.119 --> 0:22:17.639 playing field between those two sectors when it comes to financing, 0:22:17.680 --> 0:22:20.040 when it comes to moral hazard, in the bond market. 0:22:20.440 --> 0:22:27.920 Is that something that's desirable for China. It's it's something desirable, 0:22:28.000 --> 0:22:30.359 But I just don't see how that would work in 0:22:30.520 --> 0:22:34.040 this uh corporate bond market. If you put them together, 0:22:34.600 --> 0:22:40.080 the ally has explicit or implicit government guarantee, while the 0:22:40.200 --> 0:22:47.840 Nassois have duly compuri Its investors are not discriminating against 0:22:48.000 --> 0:22:53.600 the Nassois. But studying at phase three, when you see 0:22:53.680 --> 0:22:57.320 massive defaults, not massive, but you see increasing amount of 0:22:57.440 --> 0:23:02.919 defaults happening in the market, the investors are nervous. When 0:23:02.960 --> 0:23:08.360 they are nervous, they shown away from the nias we issuers. 0:23:08.880 --> 0:23:16.200 Most of them take only bob and they just block 0:23:16.359 --> 0:23:19.840 up block that nice wee bots out. But they don't 0:23:19.920 --> 0:23:24.520 even look at nicely bound. That's the that's the problem, 0:23:24.600 --> 0:23:28.560 and I just don't At the policy level, it would 0:23:28.600 --> 0:23:33.000 be difficult to find a way to level the plane 0:23:33.640 --> 0:23:38.640 field for for these two groups, especially during crisis. Speaking 0:23:38.920 --> 0:23:41.280 at the policy level, I want to sort of ask 0:23:41.440 --> 0:23:44.800 a big picture question. So you mentioned that for for 0:23:44.960 --> 0:23:49.679 most of history up until very recently, the Chinese economy, 0:23:50.280 --> 0:23:53.400 most credit was bank credit, and it wasn't There wasn't 0:23:53.400 --> 0:23:56.399 even really much of a bond market. Uh, if you 0:23:56.480 --> 0:23:59.720 go back a little bit over a decade, how much 0:23:59.800 --> 0:24:04.160 of that bank led market is especially by design, whereby 0:24:04.240 --> 0:24:07.520 authorities who have sort of priorities in terms of investment 0:24:08.040 --> 0:24:13.360 can more easily u direct bank lending. And I'm curious 0:24:13.640 --> 0:24:17.399 if the ongoing growth of the credit market as a 0:24:17.560 --> 0:24:21.639 meat is a vehicle for financing changes at all the 0:24:21.760 --> 0:24:26.639 ability of decision makers of political leaders to direct money 0:24:26.800 --> 0:24:31.080 towards key favored industries, or whether that hasn't really changed much, 0:24:31.160 --> 0:24:34.000 whether they can still do it except just through a 0:24:34.040 --> 0:24:39.040 different avenue. I think having the market based bound uh 0:24:39.480 --> 0:24:45.320 poper bound market is very important to direct especially direct 0:24:45.480 --> 0:24:51.639 funding financing sources for the disse because prior to that 0:24:51.920 --> 0:24:58.800 bank funding was mostly directed at banks leading to firms. 0:24:59.119 --> 0:25:02.200 So for the NIA slow he's this credit market is 0:25:02.240 --> 0:25:08.400 actually very important. And up to two thousand eighteen they enjoyed, 0:25:08.800 --> 0:25:14.280 uh increased the issuance, they enjoyed the financing. But posted 0:25:14.320 --> 0:25:17.840 to eighteen, as the market was going through a very 0:25:17.920 --> 0:25:23.520 stressful period, they have something process actually dried I shouldn't 0:25:23.520 --> 0:25:27.640 say dried up, but they were increasing steadily. But new 0:25:27.720 --> 0:25:31.520 issuances by nyas yes, as a fraction of the overall 0:25:31.560 --> 0:25:36.399 market decreased the first quarter of two thousand eighteen. So 0:25:36.720 --> 0:25:40.000 we've talked a lot about I guess the sort of 0:25:40.160 --> 0:25:44.399 uniqueness of China's corporate bond market at at this current 0:25:44.600 --> 0:25:48.600 moment in time, and in many ways, it's still developing 0:25:48.760 --> 0:25:51.800 and maybe it'll get to a similar level to where 0:25:51.840 --> 0:25:53.680 the US is at the moment, but it's not quite 0:25:53.760 --> 0:25:58.680 there yet. What do you think this means for international investors? 0:25:58.800 --> 0:26:03.240 Because of course, China's corporate bonds are becoming more integrated 0:26:03.560 --> 0:26:10.840 into international investors portfolios via inclusion in benchmark indusicries, including 0:26:10.960 --> 0:26:14.160 some that are owned by Bloomberg LP. I should just mention, 0:26:14.520 --> 0:26:18.560 So what does all of this mean for international investors? 0:26:18.680 --> 0:26:21.719 How should they be viewing China's corporate ball market At 0:26:21.760 --> 0:26:26.439 the moment, China's fixed incour market overall is being opening up. 0:26:26.720 --> 0:26:31.000 You see a lot of relaxing of restrictions that very 0:26:31.080 --> 0:26:36.159 much welcome the international investors. Copper body in particular, I 0:26:36.280 --> 0:26:41.200 think most of the foreign investment right now is focused 0:26:41.280 --> 0:26:45.199 on the on the yield space, not the spread space, 0:26:45.680 --> 0:26:50.440 meaning that it's focusing most of the government bomb. But 0:26:50.560 --> 0:26:54.080 the you always say, the default free bonds, not the 0:26:54.200 --> 0:26:59.880 credit bouk. Overall, I think this market would would benefit 0:27:00.200 --> 0:27:04.520 from more international investors, or conversely, maybe there will be 0:27:04.600 --> 0:27:10.720 opportunities for international investors to pick the right bond to 0:27:10.840 --> 0:27:14.600 put a different play. I think if for international investors 0:27:14.800 --> 0:27:19.800 these companies that issue couple of bonds, these are especially 0:27:19.840 --> 0:27:22.600 for the sample we started, these are large companies with 0:27:23.000 --> 0:27:26.080 listed equities, but this could be another way for them 0:27:26.160 --> 0:27:29.640 to be exposed to the real China in a sense 0:27:29.760 --> 0:27:35.760 that these are companies doing business in China. John, that 0:27:35.960 --> 0:27:39.240 was a fascinating conversation and a really good time to 0:27:39.440 --> 0:27:43.760 have that conversation given what we've just seen in China's 0:27:43.800 --> 0:27:45.720 credit markets. So thank you so much for coming on. 0:27:45.920 --> 0:27:48.760 We really appreciate it. Thank you. That was great, sure, 0:27:49.040 --> 0:28:03.320