World Economy

Chinese long-term debt looks like the ‘buy of the year’, says UBS’ Asia bonds chief

Key Points
  • China's long-term bonds are the 'buy of the year' says UBS' regional specialist
  • Property market set for a correction in Tier 1 cities
China housing in good shape, balanced again: UBS Asset Mgmt
China housing in good shape, balanced again: UBS Asset Mgmt

Investors are not looking closely enough at the compelling investment opportunities that China's inverted yield curve is throwing up, says UBS' chief regional fixed income manager.

Tight liquidity and an ongoing regulatory clampdown has pushed China's 10-year bonds to now yield less than its 5-year bonds, in a state of affairs known as yield curve inversion.

It is the first time ever this phenomenon has occurred at these specific maturities and signals that a slowdown for the Chinese economy is coming, according to Hayden Briscoe, Head of Fixed Income APAC at UBS Asset Management, speaking on CNBC's Squawk Box on Monday.

"This looks like a really nice opportunity in the second half of the year to be layering in long 10 year Chinese bonds into your portfolio," recommended Briscoe, adding that long bonds have recently suffered a liquidity squeeze-induced sell-off.

With regards to China's impending slowdown, the fixed income chief cautions that investors shouldn't be primarily worried about the effect on the country itself.

"The impact of China slowing will be more felt in rest of world rather than inside China as they've still got the tools and flexibility to deal with any extreme slowdown," he asserted, noting that Chinese authorities are now resolutely focused on addressing the country's rising debt levels which has seen national debt as a percentage of gross domestic product (GDP) soar from 152 percent in 2007 to 257 percent at the end of last year.

Chinese 100 yuan notes in Beijing.
Fred Dufour | AFP | Getty Images

Briscoe downplayed the notion of China's debt situation leading to a crisis, arguing that President Xi Jinping has already said that he intends to address the issue in the imminent future and that he has already brought on board the five big regulatory agencies to work on managing the borrowing levels.

Furthermore, there's no impeding call on the debt.

"China is a net creditor nation and until somebody calls you on your capital – it's just like the Japanese situation, we've been waiting 20 – 30 years for them to implode. Once you run out of capital, then someone can call you on it and then you're in big trouble but until then they can kick the can down the road a bit further," he affirmed.

The country's housing market is, however, priced for a correction, according to Briscoe, given the raft of measures put in place in recent years by authorities such as those restricting mortgage lending and property developer borrowing. Briscoe says that until now these developments have been really healthy and led to destocking over the past two years, leading him to have a very positive underlying outlook on the housing market.

"But the prices have to come off as they're not socially responsible especially in Tier 1 cities where you have more like 20 – 25 percent house price appreciation," he cautioned.

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