Our bullish view of Asia credit next year is predicated on our bullish view on China HY property. On top of our expectation of more easing, cheap valuation and positive demand technicals, our comparison of China HY property with other problem sectors supports our view.

Thank you 2021, next please: It's been a tough year for Asia credit, but the upside is that its valuation has become a lot cheaper going into 2022. Also, Asia credit has not experienced two consecutive years of negative returns since 2013 and has never failed to generate positive return when its yield is above 4%.

The 'problem sector' concept is not new to the credit market: The elephant in the room for the 2022 Asia credit outlook is clearly what to do with the problem sector – China HY property. We think that it makes sense to look at previous problem sectors in US and Asia credit for some wisdom. Below are four key observations that we think would help investors to manage the problem sector risk for China HY property: Observation #1: The problem sector spread should compress eventually, but it will take time. If the current peak is passed, we think that we are at most 1-2 months away from a China HY spread peak.

Observation #2: Previous problem sectors' cumulative default rates have not been higher than 35%. China HY property is pricing much higher cumulative default rates (Exhibit 2) than previous problem sectors.

Observation #3: Don't fear buying early into a problem sector. We believe that the opportunity cost of being late in adding China HY property risk is much higher than being a bit early.

Observation #4: The problem sector will likely not be the cause of the next crisis.

The next crisis in China credit is unlikely to be driven by China HY property.

Overall, the observations above are supportive of our current bullish view on China HY/China HY property.

Expecting lower net supply in 2022: Given next year's high wall of redemptions, we think that it would be challenging for next year's net issuance to be higher than this year's. We expect net issuance for Asia credit to be down 15%Y in 2022 to US$97 billion. However, gross issuance will likely increase by 24%Y in 2022 to US$327 billion.

Our top Asia credit trades for 2022: #1: Still bullish on China HY/China HY property; #2: Maintain our neutral stance on Asia IG/China IG; #3: Still prefer Asia HY/China HY over Asia IG/China IG; #4: Risk/reward favours long-end China HY property single B credits; #5: Long-end China HY BB credits look attractive.