After a series of SOE defaults, investors are watching closely to see how the market and Beijing will react

 With COVID-19 largely contained, policymakers have to decide whether to come to the rescue again

Opportunity: the highest quality SOE bonds can offer 200bp of yield pick-up over their USD bonds

Credit risk – a rosy past vs a more realistic future. China’s state-owned enterprises (SOEs) face a long overdue test about whether they can stand on their own feet. A series of recent SOE bond defaults have made investors jittery, disrupted

money markets, and spilled over into the H-share market. This coincided with Baoshang Bank, a regional lender which was taken over by the government last year, writing off its Tier-2 capital bonds. The move marked the first default of bank bonds in the RMB bond market, inflicting losses on institutional investors. Policymakers are waiting to see how the onshore credit market reacts before deciding whether to bail out struggling SOEs, as they have done in the past. Beijing has spoken for years about allowing market-driven defaults, while investors have long assumed the government will come to the rescue, distorting how risk is priced. It’s a big test.