Man Group CEO Says China Bond Defaults Will Normalize the Market

(Bloomberg) -- Man Group Plc’s Chief Executive Officer Luke Ellis, who oversees the world’s largest publicly traded hedge fund firm, said recent bond defaults in China show that regulators are trying to shift to a more “sensible” market model.

“The Chinese government, as part of their process of a mixture of liberalizing and normalizing markets, is clearly trying to get the bond market in China to be a more normal market,” Ellis said in an interview with Bloomberg Television in Hong Kong. “There’s a step-wise process to get to a place where there is sensible default risk in bonds.”

Rising credit risks in China have roiled the market amid an increase in borrowing costs spurred by a broader push by policy makers to rein in financial leverage. At least six publicly-issued onshore bonds have defaulted this quarter, compared with four in the same period of 2017.

Defaults are disruptive in the short term but positive in the long term as they improve credit differentiation and allow better pricing of debt, according to a Goldman Sachs Group Inc. note last week. Allowing over-leveraged entities to default “is important in improving the credit culture in China,”’ Kenneth Ho and Claire Cui, strategists at Goldman Sachs wrote.

China Product

Man Group, based in London, manages about $112.7 billion, the firm said last month. It sees opportunities to offer various types of investment products to Chinese clients as many investors are seeking to diversify, including ones that trade Chinese instruments, Ellis said.

It last year became the first foreign hedge fund to be allowed to sell private securities funds to investors in China and has been raising capital for a computer-driven trend-following product that initially focuses on listed futures on commodities, bonds, metals, energy and stock indices.

While some other foreign investors question China’s corporate governance and data quality, Ellis said there is enough information available to build a well-constructed portfolio in China.

“We find we can generate significant alpha in China in both A-shares and here in Hong Kong,” he said, referring to yuan denominated class-A shares traded on Shanghai and Shenzhen exchanges. He added imperfect information in China has made it easier to outperform the market.

“We don’t mind things where you have to do a little bit of work in order to understand the numbers, in order to do research,” he said. “China seems to me a perfect market for active fund management for a long time to come.”

Among some of the other points Ellis made:

  • While new developments including the class-A shares’ inclusion into MSCI Inc.’s major emerging market will potentially attract significant foreign money into China’s domestic stock market, domestic money will really drive the outcome of the market
  • Shorting in China’s stock market remains a challenge and Man Group has talked to the Chinese securities regulator on increasing the amount of hedging instruments
  • There are liquid futures instruments in China for which both bullish and bearish bets are possible
  • It is clear the Chinese government is allowing real economic data to come through, which is evident in variance of growth in different parts of the country

©2018 Bloomberg L.P.