Chinese SOE Debt

GMO
By March 1, 2021 08:38

Chinese SOE Debt

Chinese SOE Debt

In our white paper, The Mystery of SOE Debt, published in September 2020, we demonstrated that State-owned Enterprise (SOE) defaults are rare. In this update, we clarify that our SOE investment process excludes SOEs of the variety currently defaulting in China, so we stand by our statement that SOE defaults are rare, conditional on using our detailed, well-researched definition of SOEs. As active investors who can find attractively priced true SOEs at healthy spreads over the sovereign, we believe the SOEs offer attractive alphas for our emerging debt portfolios.

Recent defaults by Chinese SOEs have occupied the financial press, which is suggesting that such events may mark a regime change in the Chinese government’s handling of its SOE defaults.1 Below is an exhibit that shows our ranking of select Chinese SOEs according to a key pillar of our investment process, namely, how close we believe the SOE is to the sovereign in the event it needs a sovereign bailout. Companies on the left, like China Development Bank, are integral to the sovereign, like Fannie Mae has been to the U.S., say. On the other hand, we consider recently defaulted Chinese SOEs, like Huachen Automotive, to be hardly SOEs at all, notwithstanding how they’ve been rated – in particular by local rating agencies.

GMO
By March 1, 2021 08:38

SEARCH