Investment in China is a hot ticket for the industry at the moment, and BlackRock is making sure it’s prepared for the opportunities and challenges of this exciting and emerging market.
Operating under the umbrella of The Blackstone Group, the firm originally focused primarily on fixed-income investments.
An early success which set the company on the road to success was the establishment of the Blackstone Term Trust – an endeavor which raised a total of $1 billion.
In 1992, the company changed its name to BlackRock, and had $17 billion in assets under management.
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Today, the New York-based company is one of the world’s largest securities firms. BlackRock has revenues of over $11 billion, which places it at #255 on the Fortune 500.
China Bond Fund
The Chinese economy has grown from strength to strength in recent years. To make the most of the opportunities presented by the country’s stock market offerings, BlackRock has launched a dedicated fund for investing in this potentially lucrative new corner of the industry.
(Image source: blackrock.com)
The new BlackRock China fund, launched in December 2017, invests in A-Shares (shares listed on the Chinese domestic stock market) and the shares of Chinese companies which are listed on secondary markets. The fund aims to invest in between 30 and 50 stocks and is supported by a ten-strong dedicated team of China-focused research analysists working out of Hong Kong and Shanghai.
“Dynamic, vibrant and now more accessible than ever before, we believe Chinese equities offer investors an attractive opportunity to invest in the transformation of this huge country,”said Head of Chinese Equities and Managing Director at BlackRock, Helen Zhu. “The fund aims to blend the best opportunities, taking advantage of the nuances in the Chinese equity markets. Through flexible allocation, the fund can invest across the full range of market capitalization and Chinese stocks listed globally, whether they are listed in mainland China, Hong Kong, the US or elsewhere.”
At the end of its first quarter, the fund has been performing well overall, but it hasn’t been without its challenges.
The Challenge of Weaker Firms
BlackRock has identified at least six publicly issued bonds which have defaulted in the first quarter of 2018, which is the most in a single year according to data compiled by Bloomberg. This could lead to higher borrowing costs for China’s weaker companies as they face higher bond spreads.
(Image source: bloomberg.com)
In an effort to rein in the impact of these weaker companies, the Chinese President, Xi Jinping, has been cracking down on excessive financial borrowing, which has had the effect of around 1,445 Chinese firms seeing their debt rating implied by default risks drop significantly. This compares to just 291 Chinese companies who have seen their rating increase.
Although the Chinese central bank has been reassessing its policies in efforts to offset the pain from this campaign and cut the reserve-requirement ratio for some banks, borrowing costs for weaker firms have still risen. The extra yield investors demand to hold three-year AA- rated corporate bonds over top-rated notes has increased to 199 basis points, reported as the highest level since September 2016.
“As defaults go up, from a low base, we should see more credit differentiation and wider credit spreads for weak credits,” said Portfolio Manager of the Asia Credit Team at BlackRock in Singapore, Eric Liu. “[BlackRock prefers] state-owned companies with strategic importance to the central government or local governments because they will benefit from supply-side reforms, and their credit profiles will improve with the deleveraging efforts. In contrast, BlackRock is cautious on fundamentally weak private credits as well as state firms with little strategic importance. The possibility can’t be ruled out that China will experience its first onshore bond default by a local government financing vehicle this year, even if the chance is low.”
By identifying these challenges early, BlackRock can adjust the way it invests on behalf of its clients to mitigate the risks of weaker Chinese companies, while still making the most of the opportunities presented by the stronger arm of the China bond market.
You can hear, Eric Liu, BlackRock’s Portfolio Manager of the Asia Credit Team at BlackRock in Singapore, speak about the best channels for accessing the China bond market’s onshore and offshore high yield investment opportunities at Fixed Income Leaders Summit APAC 2018 this September at the Sheraton Towers, Singapore.
Download the agenda today for more information and insights.