Market Turbulence
"It’s kind of a minefield if you step on a Kaisa or a Shanshui," said Soon. "Chinese home builders have been quite well supported because the inventory is quite clear, a piece of land, a building, so usually there is a white knight that will bail you out at the right price but with a cement factory or a steel mill the collateral may be less valuable."
Turbulence in the country’s financial markets and currency is raising the risk of a financial crisis in the nation. China’s benchmark Shanghai Composite has tumbled 26 percent in the past six months as the yuan has fallen 5.6 percent against the dollar. The currency’s slide has spurred capital outflows that have forced the central bank to inject liquidity to hold down borrowing costs.
Western Asset’s Soon says that demand and supply for China’s dollar bonds has been very tight with Chinese investors diversifying into this debt and companies buying back their own securities.
That situation could change as the government moves to curb capital outflows, said Gaurav Singhal, a credit analyst at Nomura Holdings Inc. in Hong Kong.
"This would temper a strong positive technical support that has supported Chinese credits over the last one year," said Singhal.
Pimco is forecasting lower Chinese economic growth this year than the market expects, according to Spajic.
"Old economy credits will struggle this year," he said.