Governmental monetary and fiscal policy are well-known as the foremost concerns of fixed-income investors. One of the secondary considerations of fixed-income investors is understanding the role of the government in an issuer's ability and willingness to pay bond investors, the credit risk of a bond. This concern applies to U.S. Treasuries, as well as to the corporate debt of Argentine corporations. Investors examine both the country in which the issuer is domiciled and of the countries in which it operates.
Government involvement in payments on bonds is related to how close the financial markets are to a crisis. In the U.S. during 2008, the role and actions of the U.S. government were a major credit concern for investors in U.S. bank bonds. In the current market environment, fixed-income investors in developed markets are barely concerned with the role of governments in credit risk.
However, the fixed-income markets of emerging market countries are usually just a few missteps away from crisis, so the role of governments in credit risk is always an important consideration. Recent events have shone a bright light on the role of the Chinese government with both Chinese corporations and foreign corporations that operate in China. The bright light highlights issues that were an existing concern of emerging markets bond investors, particularly since issuers domiciled in China account for 20% of the issues in the Bloomberg Barclays Emerging Markets USD Aggregate index.
The breakdown of the China weighting of 20.06% in the index by sector shows that about 11% are classified as agency, as an arm of the government. Many of the high-yield industrials in the table below are property development firms that are particularly sensitive to government policy. Looking at the individual issues in the 20.06% weighting, and in light of the government's dominating role in the economy, it is clear that they exist at the will of the government. In addition, many of the higher-yielding bonds are actually issued by legal entities from the Cayman Islands and the British Virgin Islands. In the case of a default, the legal status may make it even more difficult to pursue payment.