In Brief

• China has undergone remarkable economic growth over the past two decades, helped by rapid industrialization and swiftly developing domestic markets. Underpinning this growth have been China’s fixed income markets, which have seen a massive increase in size and scope, to such a degree that China now has the world’s second-largest bond market, one difficult for investors to overlook—as a source of yield and diversification and because of its influence on global liquidity and interest rates.
  
  
• Particularly in the past several years, China’s liberalization of both interest rates and financial markets has triggered a surge in credit issuers and in the range of debt instruments and structures being issued.
  
  
• With the increase in opportunities in Chinese fixed income markets, however, has come greater risk. The government’s implicit guarantee on all debts outstanding has been largely eliminated. The credit fundamentals of some corporate issuers are weak. And domestic rating agencies’ methodologies have limitations. Together, these issues are creating significant credit analysis challenges. Proper due diligence and rigorous analysis of issuers are critical for understanding the true risk characteristics of onshore credit investments, so that global and local investors may take advantage of the growing market opportunities while minimizing risk.
  
  

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