26 November 2021 | 8:46PM HKT

Asia Credit Line

2022 Outlook: Mostly Low Returns, Managing China

Property Exposure the Differentiator
Kenneth Ho
+852-2978-7468 | kenneth.ho@gs.com
Goldman Sachs (Asia) L.L.C.

Chakki Ting
+852-2978-0784 | chakki.ting@gs.com
Goldman Sachs (Asia) L.L.C.

Worsening growth/inflation mix suggests wider spreads and low returns.

Whilst we expect global growth to increase by 4.5% in 2022, the fastest pace of
recovery looks to be behind us, and inflationary pressures are persisting. Against this
backdrop and with tight valuation, we expect IG spreads to widen by 10bps next year
and for Asia HY Corp spreads (excluding China property sector) to widen by 50bps.
Together with expectations of higher US Treasury yields and adjusting for defaults,
we forecast total returns from now till the end of 2022 to be -0.5% for the
ICE-BAML Asia Dollar IG index and 0.5% for the ICE-BAML Asia Dollar HY Corp
(ex-China property) index. Our forecasts show total return to be around 0% for
the bulk of the Asia credit market from now until the end of 2022.

Positive return for China property HY, but wide range of plausible outcomes.
Under our base case scenario, we expect 8.8% total return for the ICE-BAML China
Property HY index from now till the end of 2022. This is based on our expectation
that Asia HY Corp default rate will be 10.7% in 2021 and 11.9% in 2022, with the
vast majority of the defaults from the China property sector. We believe investors
should focus on the lower beta segment within China property HY, as it is possible
to foresee a wide range of outcomes. The key is avoiding defaults, which if
managed successfully, would generate higher returns than the rest of the Asia
credit market.

Beware of the best and the worst credits. We believe the best strategy for 2022 is
to focus on carry, and be cautious on the higher-rated credits (given the low spread
cushion and impact from rising Treasury yields) and on the riskiest China property HY
credits (given elevated default risks). We are neutral on IG vs HY and on IG duration
(preference to be close to 5.9yrs duration on the ICE-BAML Asia Dollar IG index),
and focus is on relative value. We see the best carry from BBB credits (China, HK,
Thailand & Singapore), Non-China Property B corporates (India, Indonesia and
Macau), and high quality China property HY.

Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.
Goldman Sachs Asia Credit Line

Table of Contents
Key market themes for 2022 3

Asia IG - Return Profile Similar To 2021 10

Asia HY – All About China Property 12

Micro Fundamentals – declining leverage, stable cash levels and lower tail risk outside of China property 15

Technicals supportive of Asia credit 18

Disclosure Appendix 21

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Goldman Sachs Asia Credit Line

Key market themes for 2022

Wider spreads on worsening growth/inflation mix. For 2022, our global economics
team is expecting global GDP to increase by 4.5%. Whilst this is more than 1pp above
potential, the fastest pace of recovery now lies behind us. Furthermore, they are
expecting comparatively sluggish performance in China, with growth expected at 4.8%.
More problematic though is the persistent inflationary pressures. Whilst our global
economics team expects inflationary pressures to abate gradually as growth slows and
supply side shocks abate, they expect inflation to settle 1/2pp above the pre-pandemic
on average. To us, this less favorable growth/inflation mix suggests that spreads are
likely to gradually widen from current levels, especially with spreads near the tightest
levels in the post-GFC period. As shown in Exhibit 1, OAS on the ICE-BAML Asia Dollar
IG index at 128bps is at the 7th percentile since Jan 2010 (meaning that it has been
tighter only 7% of the period from Jan 2010 to now), whilst OAS on the ICE-BAML Asia
Dollar HY Corp (ex-China property) index at 428bps is at the 9th percentile over the
same period. We expect spreads on the ICE-BAML Asia Dollar IG index to widen by
10bps next year, and on the ICE-BAML Asia Dollar HY Corp (ex-China property)
index to widen by 50bps (Exhibit 2). For the China property HY sector, we are
expecting spreads to remain unchanged, though the key driver to performance
will be the volume of defaults.

Exhibit 1: Valuation at the tighter end for better quality IG and HY Exhibit 2: Current OAS and 2022 end forecast for the Asian Dollar IG
Yield-to-worst and OAS percentiles since Jan 2010 for ICE-BAML and Asian Dollar HY Corp ex-China property indices (bps)
indices
Percentile Percentile
Index YTW (%) OAS (bps) Index Current Levels (bps) 2022 End Forecast (bps)
since Jan 2010 since Jan 2010
Asia Dollar IG 2.55 12.1% 128 7.3% Asian Dollar IG 128 138
Asia Dollar A 2.16 12.0% 91 0.0% Asian Dollar HY Corp
Asia Dollar BBB 3.01 12.4% 172 21.6% 428 478
(ex China property)
Asia HY Corp (ex China property) 5.38 3.7% 428 8.6%
Asia BB Corp (ex China property) 4.28 4.6% 315 13.2%
Asia B Corp (ex China property) 7.50 28.8% 644 36.1%
China HY property 29.56 99.3% 2,936 99.2%

Source: ICE-BAML, Goldman Sachs Global Investment Research Source: ICE-BAML, Goldman Sachs Global Investment Research

Find carry but beware of the best and the worst credits. Given the less favorable
macro backdrop, loss avoidance will be important for the overall Asia credit market. We
see two areas that investors should be cautious on, (1) the tightest credits, as they offer
limited spread compensation (as reflected by the tight levels in single-A spreads shown
in Exhibit 3), and are most susceptible to higher US Treasury yield, and (2) the riskiest
credits, as we expect default to stay elevated (under our base case, we expect Asia HY
Corp default rate to reach 11.9% in 2022 as shown in Exhibit 4, with 90% of the defaults
coming from the China property sector). Finding carry will be important, and we
believe the best carry will be from BBB credits, Non-China Property B corporates,
and high quality China property HY.

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Exhibit 3: Limited room for further spread tightening for A-rated Exhibit 4: Wide range of potential default outcomes in 2022
corporates Default ratio for AeJ G3 HY bond market (weighted by outstanding
OAS for A-rated corporates since 2010 with percentile (bps) amount)
Asia Dollar A-rated Corp OAS 20%

280 25th percentile 18% 17.4%

50th percentile Bear
16%
75th percentile
240 14%
11.9%
12% Base
10.7%
200 2021E
10% 9.5%
Bull
8%
160 164
6%
140
4%
120 122
97 2%

80 0%

Source: ICE-BAML, Goldman Sachs Global Investment Research Source: Bloomberg, Moody’s, S&P, Goldman Sachs Global Investment Research

Except for China property HY, a year of (mostly) zero returns. Our Global Rates team
expects US Treasury yields to move higher in 2022, forecasting 5yr yields at 1.8% and
10yr yields at 2.0% by the end of the year. Together with our expectations of moderately
wider spreads and after adjusting for defaults, we forecast the major segments of the
Asia credit market to generate a total return of around 0% next year. We expect total
return on the ICE-BAML Asia Dollar IG index to be -0.5% from now till the end of 2022,
and for the ICE-BAML Asia Dollar HY Corp (ex-China property) index to be 0.5% (Exhibit
5). We separate out the China property HY sector because of the extreme volatility in
that sector, with elevated default risk and wide valuation. For that segment, our base
case is for the ICE-BAML Asia Dollar China Property HY index to generate a return of
8.8% next year. Whilst this may appear relatively more attractive given the high returns,
an element of caution is warranted as credit stresses are unlikely to meaningfully
subside, meaning that volatility will be elevated and it is possible to foresee a wide
range of outcomes.

Exhibit 5: Near 0% total return for large sections of the Asia credit market
Total return for ICE BAML indices from now to end 2022 under different interest rate assumptions
Assumption for UST at 2022 end

Total return in 2022 end 5y@1.33 5y@1.75 5y@1.80

10y@1.64 10y@1.88 10y@2.00
(Spot) (Forward) (Gse)

Asian Dollar IG Index 2.0% -0.1% -0.5%

Asia Dollar HY Corp (ex-China property) Index 2.2% 0.2% 0.5%

Asian Dollar China HY Property Index 9.9% 8.3% 8.8%

Asian Dollar HY Corp Index 7.0% 5.1% 5.5%

Source: ICE-BAML, Bloomberg, Goldman Sachs Global Investment Research

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Neutral between IG and HY and on IG duration, focus on relative value. With our
expectations that returns will be low across both IG and HY, and with heightened levels
of uncertainties surrounding the China property sector, our preference is to stay neutral
across IG and HY, and focus on relative value. We believe that finding outperformers in
each segment is more important than taking a strong directional view that IG or HY will
outperform. Similarly, this view applies to IG duration, where we adopt a neutral stance,
with a preference to maintain duration close to the ICE-BAML Asia Dollar IG index level
of 5.9 years. The reason is two-fold – on one hand, we expect a rising yield environment,
suggesting that going long duration may be detrimental to returns; on the other hand,
spreads on the shorter dated credits have compressed much more than longer dated
spreads in 2021 (Exhibit 6 and Exhibit 7), and therefore the short end provides limited
spread cushion against rising short rates.

Exhibit 6: Significant outperformance from shorter dated China A Exhibit 7: Outperformance by shorter-dated Indonesia sovereign
corporates versus longer dated bonds bonds versus longer-dated bonds
OAS for China A Corp (ex-financials) by different duration since Jan 2021 OAS for Indonesia BBB+/BBB sovereign by different duration since Jan
(bps) 2021 (bps)
170 170

160
150
150

140 130
Indo sov
130 BBB+/BBB
China A Corp 110
7-10yr (ex-fin) 7-10yr
120
90 Indo sov
110 BBB+/BBB
China A Corp
5-7yr
100 5-7yr (ex-fin)
70 Indo sov
BBB+/BBB
90 China A Corp
3-5yr
3-5yr (ex-fin)
50 Indo sov
80 China A Corp BBB+/BBB
0-3yr (ex-fin) 0-3yr
70 30

Source: ICE-BAML, Goldman Sachs Global Investment Research Source: ICE-BAML, Goldman Sachs Global Investment Research

Navigating through the China property sector’s multi-year downturn. We expect

China policymakers will not deviate from their medium-term goal of deleveraging the
property sector, and our China property team views the policy easing since late
September as too minor to improve the visibility on when the market is going to
stabilize. The property team recently revised down their industry forecasts, and expect
new home sales to be lower by 19% next year, -29%yoy in 1H22 and -10%yoy in 2H22
(Exhibit 8). With over USD 6bn of China property HY maturing in Jan 2022 and over USD
5bn maturities in each of March and April next year, refinancing risks remain high. So
whilst our base case is for 8.8% total return in this sector from now until the end of
next year, it is plausible to see significantly lower returns if the default experience is
worse than our expectations, and vice versa. Whist we do not think investors should
stay away from China property HY, we maintain our preference for low beta
credits.

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Exhibit 8: Summary of GS 2022E forecasts for national primary housing market (base and bear cases)

2022E
2022E 2022E 1H 2H 1H 2H
yoy 2016 2017 2018 2019 2020 2021E (prior
(base) (bear) (base) (base) (bear) (bear)
GHe)
Primary GFA sold 22% 8% 1% 0% 3% 3% -15% -5% -20% -25% -6% -32% -8%
ASP 10% 6% 11% 7% 6% 3% -5% -5% -10% -6% -5% -13% -10%
New home sales 35% 14% 12% 7% 9% 6% -19% -10% -28% -29% -10% -41% -17%
New starts 8% 7% 17% 9% -1% -11% -18% -15% -25% -27% -9% -35% -14%
FAI 7% 7% 10% 10% 7% 6% -3% 0% -6% -8% 1% -9% -4%
Completion 6% -4% -8% 3% -5% 3% -5% +10% -10% -10% -2% -19% -4%

Source: NBS, Gao Hua Securities Research

“Less tight but not loose” stance in China, in an important political year. The
upcoming 20th Party Congress means 2022 will be an important political year in China.
With internal risks such as the property slowdown and energy shortages requiring
delicate management, our China economics team expects the policy stance to be “less
tight but not loose”. “Less tight” to ensure economic stability, and “not loose” as the
credit cleanup remains an important medium-term policy goal. They expect the
slowdown in the property sector to provide a drag of around -1% to GDP, partly offset by
their augmented fiscal deficit widening to 12% of GDP from 11% in 2021, with this
supplemented by LGFV bond issuance. Under such conditions, we do not expect a
significant rise in defaults in the non-property space in China, and believe LGFV reforms
(which we expect will take the form of the commercialization of LGFVs) will continue to
be very gradual. Note that our China Onshore Credit Stress Index (Exhibit 9) is not
showing any signs of stress, suggesting that credit issues remain compartmentalized
within the China property sector.

Exhibit 9: GS China Onshore Credit Stress Index

Z-score, as of Nov 25 2021

4.00 higher stress

Draft of
lower stress
3.00 new Asset
Hawkish
monetary management Baoshang Worries on
2.00 stance rule Bank takeover CFLD
China COVID-19
1.00 policy easing

0.00
New Asset
Entrust bond management
-1.00 agreement -0.86
rule
concerns Huarong
Yongmei
-2.00 China confirms delayed
phase 1 trade missed
earnings
deal with US payment
-3.00
Dongbei Special Steel COVID-19
default
-4.00

Source: Goldman Sachs Global Investment Research

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SE Asia can continue to perform well. Despite the unpredictable impact from COVID
infections this year for the India and Indonesia economies, both have outperformed in
the IG and HY markets. We see several factors contributing to the outperformance.
First, the volatility in China property HY meant investors diversified into non-China HY;
second, fallen angel risk has reduced for India IG, with Moody’s removing the negative
outlook on its Baa3 rating in Oct 2021 as financial sector risks recede; and third,
technicals remain supportive with strong EM fund flows. We believe India and Indonesia
credits can continue to perform well in 2022. Our Asia economics team expects
economic activities for the laggards in regional reopening – particularly Southeast Asia
and India – to accelerate, as falling restrictions enable a rebound towards potential
output (Exhibit 10).

Exhibit 10: As ASEAN and India reopen, they should post stronger full-year growth in 2022

10
Later reopening
(faster growth in 2022) India
9
Real GDP growth in 2022 (percent change, yoy)

8 Philippines

Vietnam
7 Malaysia

6
Indonesia
China
5
Australia Singapore

4 Thailand NZ

Korea Hong Kong

3 Japan Taiwan

1 Earlier reopening
(faster growth in 2021)
0
0 1 2 3 4 5 6 7 8 9 10
Real GDP growth in 2021 (percent change, yoy)

Source: Goldman Sachs Global Investment Research

ESG investing to come of age. Although ESG bonds are still a small share of the
market (6.7% of the AeJ G3 bond market), their issuance has picked up significantly
over recent years. So far this year, AeJ ESG bond issuance has reached USD 63bn,
representing 17% of total Asia G3 bond issuance volume, and already surpassing the
sum of ESG bond issuances over the past two years. Whilst ESG bonds are becoming a
more relevant asset class, a more important development is the incorporation of ESG
principles across the broader investment processes for Asia credit investors. We see
three factors to watch for going forward: (1) Standardization of ESG metrics will be
important as the market grows; (2) Shifting towards forward-looking ESG metrics, and to
look beyond assessing a company’s current operational ESG profile, and (3) Linking ESG
to credit fundamentals, such that ESG factors that affect a company’s credit profile can
be assessed and identified.

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Exhibit 11: Sharp rise in ESG fixed income flows over the past two Exhibit 12: But strong issuance YTD surpassing the past two years’
years issuance
AUM in global ESG fixed income funds (USD bn) AeJ G3 currency ICMA-labelled ESG bonds issuance by type (notional
amount, USD bn)
ETF Sustainability-linked
500 478
Mutual Funds 70 63
450 Social
400 60 Sustainability
347 Green
350 50
300 40
250
30 24
200 23
150 124
20 16
13
100 10 6
49 57 1
50 18 20 27 0.3
10 12 0
0 2014 2015 2016 2017 2018 2019 2020 2021
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 YTD

Source: EPFR, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

Further interest rate repricing the biggest concern, more so than COVID concerns.
The rising inflationary pressures and sticky nominal rates meant real yields have turned
negative in the US (Exhibit 13). The negative real yield environment provides support to
risky assets as investors seek real returns, and our Global Equity Strategy team sees the
negative real yields as a tailwind for equities in 2022. Our Global Rates team believes
that depressed levels to longer maturity real rates is likely supported by a
supply/demand imbalance that could take time to resolve. However, such an
environment could change should inflationary pressures prove to be less transitory than
expected, and we note that our US economics team recently shifted their views to a
faster pace of tapering that would conclude in March 2022 (from June earlier) and are
now expecting three Fed hikes next year (from two previously). We see a less benign
rates environment as the biggest risk to credit as it could interrupt the strong search for
yield motives that have supported the Asia credit market in recent years. We expect the
risks to be more impactful than from rising COVID infections. Despite the recent
resurgence in infection rates in Northern Europe and in several Northern US states, our
Global Economics team remain less concerned about the growth impact of rising
infections than last year.

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Exhibit 13: 10y real yields across regions

Nominal bond yield minus CPI inflation swap (RPI for the UK)
5

0
Japan
-1
US
-2
Germany
-3
UK
-4

Source: Bloomberg, Goldman Sachs Global Investment Research

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Goldman Sachs Asia Credit Line

Asia IG - Return Profile Similar To 2021

Return profile similar to 2021. We expect total return on the ICE-BAML Asia Dollar IG
index to be -0.5% from now till the end of 2022, driven by moderate increases in both
spreads and US Treasury yield. We believe the return profile will be similar to 2018 and
2021, and it will be the 3rd time in 5 years with IG returns close to 0%. That said, we
think the likelihood of a more negative outcome is low. Exhibit 14 shows the annual total
return on the ICE-BAML Asia Dollar IG Index over the past two decades, and only in
2008 (during the GFC with significant widening in spreads) and in 2013 (with taper
tantrum and the sharp rise in US Treasury yields) did we see negative total return of
more than 1%.

Exhibit 14: Another year of low IG return in 2022

Total Return of Asian Dollar IG Index (%) and changes in UST 10y yield and IG spreads (bps)
25%
Total Return (LHS)
25% 750
OAS Change (RHS) 20%
US 10 Year Treasury Yield Change
(RHS) 15%
20% 600

Total Return
10%
15% 450
5%
Total Return

bps
10% 0% 300

-5%
5% 150

0% 0

80% Total Return (LHS) 1,600 140%

-5% -150
OAS Change (RHS) 1,400 120%
60% 1,200
US 10 Year Treasury 100%
Yield Change (RHS) 1,000
80%
Source: ICE-BAML, Bloomberg, Goldman Sachs Global Investment Research

Stay close to 5yr duration and move down in credit quality. To outperform in Asia IG
in 2022, we think investors should position for higher rates. That said, we do not think
that investors should concentrate positioning in the short end. As shown in Exhibit 15,
the US Treasury Dec 2022 forward yield at the 5yr point is close to our rates team’s end
2022 forecasts, and hence market expectations are in line with our expectations at that
part of the curve. Furthermore, low yield and low spreads at the short end makes that
part of the curve less attractive, and we think investors should concentrate at around
the 5yr point. Aside from longer duration exposure, the other area to be cautious on is
the A-rated segment. As shown in Exhibit 16, the major sub-segments of the ICE-BAML
A Corp indices are all at or tighter than pre-COVID levels, and in some cases, near the
tights seen over the past two decades. Therefore, they offer very limited spread cushion
against higher rates.

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Exhibit 15: US Treasury yield curve forward vs. GS forecast at 2022 Exhibit 16: A rated spreads tighter than pre-COVID levels
end OAS for A-rated corporates since Jan 2017 across different regions
Treasury yield (%) (bps)
2.20
GS Forecast 250

2.00

200
1.80
Forward Curve

1.60 150

China A Corp
1.40 (ex fin)
100 Singapore A
Corp (ex fin)
HK A Corp
1.20 (ex fin)
Korea A Corp
50 (ex fin)

1.00
2 yr 5 yr 10 yr

Source: Bloomberg, Goldman Sachs Global Investment Research Source: ICE-BAML, Goldman Sachs Global Investment Research

Concentrate on BBB+/BBB credits, and idiosyncratic situations in BBB-. In contrast

to the A rated segment, the ICE-BAML BBB+/BBB Corp sub-indices show spread levels
near to or wider than pre-COVID levels. To us, BBB+/BBB credits provide the most
value in Asia IG, and the main sub-segments are China, HK, Thailand and Malaysia
(Exhibit 17). For the BBB- segment, it shows a similar picture to the BBB+/BBB sector,
but with larger spread volatility, which is not surprising given the potential fallen angel
risks for BBB- rated credits. We expect Indonesia and India BBB- to be stable,
reflecting better growth prospects for both countries in 2022, whilst opportunities
in China BBB- credits depends on managing idiosyncratic risks.

Exhibit 17: BBB+/BBB spread at or higher than pre-pandemic levels Exhibit 18: Idiosyncratic moves for China BBB- corp
OAS for BBB+/BBB corporates since 2017 across different regions (bps) OAS for BBB- corporates since 2017 across different regions (bps)
600
400 550

500
350
450

300 400

350
250 China
BBB+/BBB Corp 300 China BBB- Corp
non-property non-property
200 Thailand 250
BBB+/BBB Corp
(ex fin) 200 Indonesia BBB-
150 Malaysia Corp (ex fin)
BBB+/BBB Corp 150 India BBB- Corp
(ex fin) (ex fin)
100 HK BBB+/BBB 100
Corp (ex fin)

Source: ICE-BAML, Goldman Sachs Global Investment Research Source: ICE-BAML, Goldman Sachs Global Investment Research

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Asia HY – All About China Property

Market pricing in large jump in potential defaults within China Property HY. The
China Property HY sector remains highly volatile, with the market pricing in significant
amounts of potential defaults going forward. For example, 42% of the China Property
HY bonds that are currently not in default have bond prices below 70. Note that, despite
elevated levels of stress, neither Evergrande (with USD 19.2bn of offshore bonds
outstanding) nor Kaisa (with USD 11.6bn of offshore bonds outstanding) are considered
to be in default. These two companies have been in sharp focus given their large
amounts of bonds outstanding. Note that Evergrande has missed USD coupon
payments, but are within the 30-day grace period, and Kaisa has not had a payment
default on its USD bonds, though they have announced they are to seeking to conduct a
debt exchange on a bond that matures in December 2021.

Using current market prices to estimate China Property HY defaults. We utilize

current market prices as a guide to estimating the amount of defaults in China Property
HY. While we take no view on individual bonds or companies, for the purpose of market
forecasting we present a base case scenario where we assume that, from now until the
end of 2022, 100% of the bonds below 40 will default, 50% price between 40 and 50
will default, and 20% priced between 50 and 60 will default. Under that scenario, the
China Property HY default rate would be 28.7% from now until end of next year.
However, there is very little visibility on the amount of defaults, and it remains very
difficult to adopt a strong view. Therefore, we also present a bull case (where the China
Property HY default rate would be 24.2%) and bear case (where the default rate goes
up to 39.1%.) The assumptions are detailed in Exhibit 19.

Exhibit 19: China Property HY default assumptions from now until end 2022

Outstanding % of bond as of Weighted Default rate scenarios

Price bucket
(USD mn) China HY Property Avg YTW
Bear Case Base Case Bull Case
Above $90 39,964 28% 7% 0% 0% 0%
$ 80 to 90 29,070 20% 14% 10% 0% 0%
$ 70 to 80 13,142 9% 16% 20% 0% 0%
$ 60 to 70 10,516 7% 31% 40% 0% 0%
$ 50 to 60 6,416 4% 47% 60% 20% 0%
$ 40 to 50 8,689 6% 59% 80% 50% 40%
$ 30 to 40 17,182 12% 70% 100% 100% 75%
Below $30 18,249 13% 109% 100% 100% 100%
Weighted Average Default Rate:
Total 143,228 100% 39.1% 28.7% 24.2%
Source: Bloomberg, Goldman Sachs Global Investment Research

Assuming spreads unchanged and recovery at 30 to estimate China property

returns. With a large number of variables, it remains very challenging to estimate
returns on China property HY, and for simplification, we make the following
assumptions: (1) spreads remain unchanged in 2022, (2) recovery at 30, as that is
roughly where the defaulted bonds issued by China Fortune Land, Fantasia and Yango
Group trade (with the exception of bonds currently trading below 30, where we assume
recovery to be at their current market price), (3) assume defaults will occur at the end of
2021 or start of 2022, and (4) yield-to-worst for each price range is the weighted average

26 November 2021 12
Goldman Sachs Asia Credit Line

yield for bonds with maturity of more than 1yr, to avoid the distortion from short dated
bonds having very high YTW. This simplified methodology means that positive returns
from now till end 2022 will come from carry, whilst negative return will come from
defaults. For example, if a bond priced at 60 does not default, it would generate a yield
of 31% (which is the weighted average yield for bonds with greater than 1yr maturity
priced between 60 and 70, as shown in the table in Exhibit 19), but if that bond were to
default, it would generate a negative return of 50% (the bond price of 60 less the
recovery assumption at 30).

Large range of potential outcomes suggest nuanced approach to China property

HY is required. Using the methodology outlined above, we estimate total return of
8.8% for China property HY from now till end of 2022. This contrasts with 12.8% under
our bull case and 0% in our bear case, underlining the wide range of potential
outcomes. Furthermore, it is plausible to paint an even more negative scenario (e.g., if
we see defaults amongst the high priced bonds) or a more positive scenario (e.g., if
default experience is better than expected and spreads tighten significantly). Given the
inherent difficulties in estimating defaults and returns, we think an element of caution is
warranted, though we think investors should not be underweight the sector given the
high potential returns. We think the best strategy continues to be focusing on low
beta credits, until there is more clarity on how developers will manage through
the large bond maturities in early 2022. For example, developers may sell assets to
repay debts, engage in debt exchanges, or go into a larger scale debt restructuring. They
all provide different outcomes, and right now, there is a lack of visibility on how the
upcoming maturities will be addressed. Hence, we prefer to wait before considering
moving down in credit quality.

Exhibit 20: Total Return of Asian Dollar HY Corp index and China HY Exhibit 21: China G3 HY Property bond market cumulative
Property index under different scenario, from now till end 2022 percentage of notional outstanding
110
Asian Dollar HY Corp 105 Evergrande bonds
100
China HY Property 95 Kaisa bonds
0.2% 90
Bear Case
85
-0.04% 80
75
70
Bond price

65
60
5.5% 55
Base Case
50
8.8% 45
40
35
30
7.9% 25
Bull Case 20
15
12.8% 10
5
0
-5% 0% 5% 10% 15% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Total Return (%) Cumulative percentage of notional outstanding (%)

Source: ICE-BAML, Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research

Macau Gaming HY and Non-China Property B could outperform. In a recent Asia

Credit Trader, we highlighted Macau Gaming HY (Exhibit 22) as attractive. We would see
more clarity on the renewal of the gaming licenses as a catalyst for the sector to
outperform. The other segment that looks attractive is non-China property B-rated
credits. Unlike the BB sector, yield on the B-rated segment is relatively high at 7.5% and
are at the 29th percentile since Jan 2010, suggesting that valuation is not overly
expensive (Exhibit 23). Note that a sizeable amount of the B-rated corporates are in the

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metals and mining space, and our commodities team are maintaining their bullish
commodity call.

Exhibit 22: YTW for Macau Gaming HY (%) Exhibit 23: YTW for Asia G3 B-rated corp ex China Property since
Jan 2010 (%)
7.0
24 Asia Dollar B-rated corp ex China Property YTW (%)
22 25th percentile
6.5
20 50th percentile
6.0
75th percentile
18
Yield-to-worst (%)

16
5.5
14
5.0 12
10 9.8
4.5 8 8.2
7.5
6 7.2
4.0
4
3.5
Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21

Source: ICE-BAML, Goldman Sachs Global Investment Research Source: ICE-BAML, Goldman Sachs Global Investment Research

26 November 2021 14
Goldman Sachs Asia Credit Line

Micro Fundamentals – declining leverage, stable cash levels and lower tail
risk outside of China property

Declining median gross and net leverage. To assess the health of the corporate
sector, we calculate the median leverage metrics for listed non-financial companies
across the Asian equity bourses. We have excluded China property from the analysis.
The reason is due to the accounting treatment on property sales1 for China property
developers, making it difficult to use the same credit metrics to compare property
developers with the wider corporate sector. Note that only a small proportion of India
listed non-financial corporates have published 1H21 results at the time of writing, so the
ratios for India are only updated as of 2020 end. As shown in Exhibit 24 and Exhibit 25,
gross leverage has fallen across the board, with median gross debt/EBITDA lower in
1H21 compared with 2020 levels. Net leverage also declined across the board, except
for Hong Kong and mainland China which saw mild increase (Exhibit 26, Exhibit 27).
These indicated that, overall, leverage has improved following the post-COVID
deterioration.

Exhibit 24: Median total debt/EBITDA for Asian listed non-financial Exhibit 25: Median total debt/EBITDA for Asian listed non-financial
corporates (x) corporates (x)
5.0
6.0
4.5 5.5
5.0
4.0
Hong Kong, 4.5
3.7
3.5 4.0 Singapore,
3.5 3.2
3.0 Korea, 3.1 India, 3.3
3.0
Indonesia,
2.5 2.8
2.5
2.0 China, 2.5
Thailand, 2.4
2.0 1.5 Philippines,
Malaysia, 1.9 2.5
1.0
1.5

Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research

1
revenue are only booked upon completion of a project, and not when an actual pre-sale took place, which
can be 1 to 2 year prior to completion

26 November 2021 15
Goldman Sachs Asia Credit Line

Exhibit 26: Median net debt/EBITDA for Asian listed non-financial Exhibit 27: Median net debt/EBITDA for Asian listed non-financial
corporates (x) corporates (x)
3.5
4.5
3.0 4.0
3.5
2.5
3.0
India, 2.7
2.0 2.5
Indonesia,
2.0 1.8
1.5 Thailand, 1.5
1.5 Philippines,
Hong Kong, 1.2
1.0 1.0
0.9 Singapore,
0.5 0.8
Korea, 0.8
0.5 0.0 China, 0.3
Malaysia, 0.3 -0.5
0.0

Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research

Cash to short-term debt broadly stable. Median cash to short-term debt ratios have
remained stable across most economies, except for notable improvements for Korea
and Singapore (Exhibit 28, Exhibit 29). These indicate that cash levels are overall at
healthy levels across the board.

Exhibit 28: Median Cash/Short-term debt for Asian listed Exhibit 29: Median Cash/Short-term debt for Asian listed
non-financial corporates (x) non-financial corporates (x)
2.5 2.5
Singapore,
2.2
2.0 2.0
Malaysia, 1.7

1.5 Hong Kong, 1.5 China, 1.4

1.4
Philippines,
Korea, 1.3 1.0 1.0
1.0
Indonesia,
0.5 0.6
0.5
Thailand, 0.5 India, 0.3
0.0
0.0

Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research

Debt serviceability remains high. Median EBITDA interest coverage ratios improved
for most economies, except for Hong Kong and mainland China which declined
moderately. Korea, Thailand and Malaysia saw the most improvement in EBITDA/interest
expense (Exhibit 30, Exhibit 31). That said, Median EBITDA/intrest coverage ratios
remain healthy across the board, and to us, they indicate strong debt serviceability
across most Asian economies.

26 November 2021 16
Goldman Sachs Asia Credit Line

Exhibit 30: Median EBITDA/interest expense for Asian listed Exhibit 31: Median EBITDA/interest expense for Asian listed
non-financial corporates (x) non-financial corporates (x)
11 12

10 10
Korea, 9.2
China, 8.8
9 Malaysia, 8.6 8

8 Philippines,
Thailand, 7.9 6
4.9
7 Singapore,
4 4.6
6 Indonesia,
2 3.2
5 India, 2.8
Hong Kong, 0
4 4.2

Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research

Lower tail risks outside of China property. Our favored metric for measuring credit
stress is the percentage of total debt that is issued by non-financial corporates with an
EBITDA/interest coverage ratio of below 1x. The ratio peaked in 2020 and started to
decline in 1H21 for most economies, indicating credit stresses due to COVID are
starting to decline, in line with the economic recovery. Singapore saw the most
significant fall, in line with its sharp fall in leverage and rising cash/short term debt. It is
worth noting that the ratio is only 6% for China, with the China property sector being
excluded. This is in line with our view that credit stresses in China are largely
compartmentalized within the property sector, and with limited spillover effect to other
listed corporates in China and Asia (Exhibit 32).

Exhibit 32: % of debt issued by Asian listed non-financial corporates with EBITDA/interest expense<1x in
different markets

35%

30%

25%
India, 22%
20% Indonesia, 20%

Hong Kong, 17%

15%
Singapore, 12%
10% Malaysia, 10%
Philippines, 9%
China, 6%
5%
Korea, 6%

0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1H21

Source: FactSet, Goldman Sachs Global Investment Research

26 November 2021 17
Goldman Sachs Asia Credit Line

Technicals supportive of Asia credit

Asia credit supported by long-term capital outflow. Capital outflow from Asian
economies into the bond market has continued its structural upward trend over the past
decade (Exhibit 33). Although the growth in Hong Kong and Korea has tapered off in
recent years, China, Taiwan and Singapore’s capital outflows into bond markets have
continued to climb upwards steadily. This should support demand for purchasing
offshore bonds by Asian investors.

Exhibit 33: Cumulative capital outflow into bond markets as of June 2021 (USD bn, year 1999 = 0)

660
Taiwan
600

540

480
China
420
Singapore
360
HK
300

240 Korea

180

120 Others
in AeJ
60

0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: IMF, Goldman Sachs Global Investment Research

Asian purchases recover from COVID-19 pause. Exhibit 34 plots the monthly offshore
bond purchases in Asia over the past two decades, and the trend has been rising since
the global financial crisis. Monthly purchases dropped to zero in 2020, which we
attribute to the impact of COVID-19 and significant market volatility, but recovered to
previous levels shortly thereafter. On the same note, purchases from Chinese investors
briefly dropped to zero in 2020 and recovered after that (Exhibit 35).

26 November 2021 18
Goldman Sachs Asia Credit Line

Exhibit 34: Monthly capital outflows from AeJ into bond markets as Exhibit 35: Monthly China capital outflows into bond markets as of
of June 2021 (USD bn) June 2021 (USD bn)
40 12

30 10

20 8

10 6

0 4

-10 2

-20 0

Source: IMF, Goldman Sachs Global Investment Research Source: IMF, Goldman Sachs Global Investment Research

China bid remains intact. Chinese financial institutions have been an important force in
purchasing Asia ex-Japan bonds in recent years, particularly for China IG bonds. FX
deposits in China financial institutions reached a new high this year to USD 1,020bn in
July, and has declined slightly to USD 1,010bn in October (Exhibit 36). One possible
explanation is the stellar performance in exports this year, which rose 27.1% yoy in
October. However, our China economists think it is unlikely for exports to repeat this
year’s stellar performance. Another important driver for FX deposits is movements in
RMB. Our previous analysis shows that the flow of FX deposits and the USDCNY
exchange rate are correlated, with FX deposits as a % of all deposits in China financial
institutions falling after sharp appreciation of RMB and vice versa. Going into 2022, our
FX strategists expect USDCNY to strengthen to 6.2 in the next 12 months from 6.4 as
of the time of writing. Given the moderate RMB strengthening, we don’t see FX
deposits falling sharply next year, which should be supportive for the Asia dollar bond
market. Besides FX deposits in China financial institutions, non-CNH FX deposits in
Hong Kong continue on a gradual rising trend (Exhibit 37). There is no information
available as to where the deposits originate, but we think that capital outflows from
China have been a contributing factor.

Exhibit 36: Foreign currency deposits in China financial institutions Exhibit 37: Non-CNH foreign currency deposits in Hong Kong as of
as of Oct 2021 Sep 2021
FX deposit as % of all deposit in China financial institutions (RHS) Non-CNH FX deposit as % of all deposit in HK (RHS) 50%
FX deposit in China financial institutions (USD bn, LHS) Non-CNH FX deposits in HK (HKD bn, LHS)
1,050 3.80% 6,000 48%
950
46%
850 3.30% 5,000
750 44%
650
2.80% 4,000 42%
550
450 40%
350 2.30% 3,000
38%
250
150 1.80% 2,000 36%
Jan-07
Jan-08
Jan-09

Jan-11

Jan-13

Jan-15

Jan-17

Jan-19

Jan-21
Jan-10

Jan-12

Jan-14

Jan-16

Jan-18

Jan-20
Jan-07

Jan-09
Jan-10

Jan-12

Jan-14
Jan-15

Jan-17

Jan-19
Jan-20
Jan-08

Jan-11

Jan-13

Jan-16

Jan-18

Jan-21

Source: HKMA, PBOC, Wind Source: HKMA, PBOC, Wind

26 November 2021 19
Goldman Sachs Asia Credit Line

Potential support from southbound bond connect going forward. China launched
the Southbound bond connect on Sep 24 2021, enabling mainland institutional investors
to invest in the Hong Kong bond market with a daily quota of RMB 20bn and an annual
quota of RMB 500bn. The daily quota would be equivalent to 0.3% of China G3 currency
bond market in terms of notional outstanding, or 8.5% using the annual quota. We see
this as an important milestone for China to widen its access to international capital
markets, and this is likely to strengthen the already close linkage between China
onshore and offshore credit markets. That said, quite a number of large Chinese banks
and asset managers have already become active investors in the offshore G3 currency
bond market through offshore branches or QDII scheme, and given that the daily and
annual quota are relatively low, we think it will take more time for southbound flows to
become a major supportive factor for the China offshore bond market.

Expecting USD 440bn in issuance next year. Asia ex-Japan G3 currency bond
issuance has reached USD 370bn so far this year, already exceeding the record full-year
issuance of USD 363bn last year (Exhibit 38). We expect USD 262bn of bonds coming
due next year with USD 168bn from IG, USD 62bn from HY and USD 32bn non-rated
(Exhibit 39). This is 26% higher than the USD 208bn bonds that we estimated have
matured in 2021. We are maintaining our forecast of USD 400bn in total issuance for
2021, and expect a 10% increase to USD 440bn in 2022, reflecting heavy maturities
coming due though offset by a rising yield environment that may deter more issuance.

Exhibit 38: Asia ex-Japan G3-currency bond issuance Exhibit 39: Maturity schedule of Asia ex-Japan G3-currency bonds
(2010-2021YTD) (USD, bn)
(USD, bn)
IG IG
242 246
240 HY 240 HY
218
NR 205 204 NR
200 188 200
168 175
160 160
133 139 140
125
120 124
120 120
86 82 89
77 72
80 72 80 70
62 56 54
44 54 41 54 52 51 49 50
40 44 40 39 33 46 45
29 34 39 44
40 21 19
27
19 31 40 32
24
34 32 34
20 14 18
7 6 1 16 2 5 5 6 9 13 72 8 2 3
3 3 5 1
0 0
08 09 10 11 12 13 14 15 16 17 18 19 20 21 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032+
YTD

Source: Bloomberg Source: Bloomberg

26 November 2021 20