Comments on China's rating

Charles de Quinsonas, Deputy Fund Manager of the M&G Emerging Markets Bond Fund

“After today’s decision by Moody’s, the rating of Chinese sovereign bonds seems more aligned with our own views. From a corporate perspective – although international investors are not too involved in Chinese bonds – the downgrade may trigger more scrutiny on the country’s sovereign credit profile. Given that most state owned enterprises (SOEs) get multiple rating uplifts on the basis that the sovereign is a strong credit it may result in investors increasingly looking at standalone credit fundamentals of these SOEs.

“In general, they are highly leveraged and their standalone credit profiles are weak. In the meantime, spreads remain tight so either (i) local investors continue to disregard credit fundamentals and spreads will continue to be tight, or (ii) they start looking at fundamentals on the back of the aforementioned weaker sovereign credit support, may think they are not getting paid anymore and hence there is downside risk in China’s corporate bonds.”

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