(Oct 29): China’s technology ambitions are at the epicentre of the nation’s trade dispute with the US. Not that you’d know it from the bond market.
Credit investors who bought Chinese tech debt at the start of the year are sitting on a 13% return, more than any other sector, Bank of America Merrill Lynch indexes show. Industry titans from JD.com, Inc. to Tencent Holdings Ltd. and Sunny Optical Technology Group Co. are in favour with US$192 billion ($262 billion) Swiss asset manager Pictet Asset Management Ltd.
With the trade war hanging over the global economy and tech in particular, this may seem counterintuitive. But President Donald Trump’s efforts to rein in Huawei Technologies Co. and force supply chain changes have little impact on large parts of the industry that are focused on domestic demand. Plus, the revenues of tech manufacturers that don’t export to the US aren’t directly hit by Trump’s tariffs.
“There are no Asian countries that are completely immune to the US-China trade conflict, but we do see some resilient Chinese corporates,” said Thomas Wu, head of Asia fixed income at Pictet, highlighting Sunny Optical, JD.com and Tencent. “The tech-internet sector has been quite defensive in terms of how it’s faring in the trade war.”
While the trade tariffs have seen some component makers like Sunny Optical look to set up factories outside China, their revenues are still largely dependent on customer demand, according to Bloomberg Intelligence analyst Charles Shum.
Domestic consumers accounted for 84% of Sunny Optical’s revenue last year, while exports to the US contributed only 2.1%, according to data compiled by Bloomberg. For online retailer JD.com and internet giant Tencent, domestic demand accounted for at least 97% of their revenue in 2018.
Even Huawei bonds aren’t faring too badly. The tech giant’s parent Huawei Investment & Holding Co. saw a strong onshore yuan bond debut last week, spurred in part by nationalistic buying. Its dollar bonds due 2026 and 2027 have returned at least 18% this year, beating the 10% from a Bloomberg Barclays index for emerging markets in Asia. Local demand accounted for more than half of the firm’s revenue last year.
US regulators are set to vote next month on a proposal to prevent government subsidies from being spent on gear from Huawei. The Trump administration in May moved to restrict US companies from doing business with the Chinese tech giant, but it has since issued temporary licenses allowing some sales to the company.
For the best returns from investing in Chinese corporate bonds, “technology selections need to be internally focused rather than exposed to what’s going on outside,” said Leo Hu, senior portfolio manager for hard-currency emerging market debt at NN Investment Partners Ltd., who doesn’t expect the US to lower the tariffs on Chinese goods in the near term.
Firms focused on certain parts of technology as well as the consumer sector will be the “rising stars” for China credit, according to Hu. The country’s large population and established industrial ecosystem will support its tech sector, he said.
