Editor’s note: “Analyzing New Trends and Exploring New Ideas — China Securities Credit 2021 Credit Service Annual Conference” sponsored by China Securities Credit Investment Co., Ltd. was successfully held in Shenzhen. Professionals in the field of brokerage, banking, insurance, financing, funds, factoring, credit technology, and industry management departments participated in the conference to jointly conduct in-depth discussions and exchanges on the development trend of the credit market and the digital transformation of the financial assurance industry. Now we will sort out the core opinions of the experts and share them with you. The topic shared herein is “Macroeconomic Trends and Credit Market Outlook”.   (The speaker's views only represent personal ones, have nothing to do with the unit and the conference organizer, and are for reference only.)   2021: Macroeconomic Trends and Asset Allocation Strategies Speaker: Li Xunlei, Chief Economist of Zhongtai Securities   Core points of view: In terms of macroeconomic trends, the global impact of the epidemic did not trigger a liquidity crisis, but attention should be paid to the global debt problem caused by over-issued currency and continuous leverage increase. The global economy rebounds in 2021, but it is still a super drop bounce and will not change the long-term trend.   China's economic rebound last year was related to the high growth of the new economy to some extent, but the most important factor that drove the overall economic recovery was real estate. In 2021, the real GDP growth center of China's economy is expected to be around 8.5% and the nominal GDP growth center can reach 11%-11.5%, which will basically achieve the goal of "stabilizing the leverage".   In the era of differentiation under the stock economy, the Chinese economy is facing structural motivation and pressure. First, the residents’ income differentiation and consumption upgrading have become more apparent; second, the differentiation of industries will be further intensified, the new economy will maintain rapid growth, and traditional industries will fall into slow growth; third, the differentiation of enterprises is more apparent and the profit growth of large market capitalization companies far exceeds the average level of the market.   The focus of the policy in 2021 can be summarized as "to maintain sustainable economic growth and achieve transformation and upgrading". Expanding domestic demand and strengthening technology are the two key factors for stable economic growth. The development opportunity of import substitution on the supply side of the "domestic cycle" should be grasped.   Regarding the allocation of large-scale assets, the allocation logic has to change over time, which can expand the proportion of financial asset allocation. Specifically:   1. Monetary policy has returned to be normal and the proportion of direct financing has been increased. 2. Investment under the dominance of the stock economy should adhere to three main ideas. First, the strong will stay strong. The asset allocation must focus on the large and eliminate the small and focus on the high-end and eliminate the low-end. Second, “One man's loss is another's gain”. The surplus money leads to the conversion between new and old industries and the differentiation of regional economies, some of which are booming and some are declining. Third, the survival of the fittest. The era of lying down and making money is over, whereas the chance of lying down and being shot is high. 3. Nowadays, the three major surpluses in the global economy are commodity surplus, currency surplus, and asset surplus. Behind the global structural bull market are structural distortions under economic differentiation. The direction of strategic asset allocation is to lead incremental assets to equities, funds, and bonds. 4. From the perspective of the domestic market, a substantial increase in stock supply will affect the existing "track" valuation system and weaken the liquidity while the valuation of core assets increases, hence high-growth companies can only be one out of a hundred.   In terms of specific asset allocation, traditional industries choose leading companies while emerging industries emphasize technological content. From the perspective of medium and long-term strategic allocation, traditional industries are optimistic about the increase in the share of leading companies while emerging industries pay close attention to technological progress thinking that companies with high technological content are more worthy of investment.   There are structural opportunities in the domestic real estate market that is undergoing changes in the population flow, capital flow, and information flow. The Guangdong-Hong Kong-Macao Greater Bay Area, Hangzhou Bay, and the Yangtze River Economic Belt are of more value for asset allocation. Regarding the appreciation of the RMB exchange rate, the basis for the RMB exchange rate to become an international currency lies in its economic strength. With the growth of China's national strength, the RMB is expected to become the world's third-largest international currency in the future. In the long run, the US dollar index seems to enter a downward cycle.   Opportunity or Risk? — Research and Judgment on the Trend of Interest Rate Bond Market Speaker: Sun Binbin, Chief Fixed Income Analyst of Tianfeng Securities   Core points of view: Regarding the trend of the interest rate, the market consensus is range fluctuations, but how large is the range of the difference? If the policy interest rate is not adjusted, according to the interest rate corridor R007, the fluctuation range is about 1.8%-3.2%, near the center of 2.5%, the upper limit of one-year MLF corresponding to one-year treasury bonds is 2.95%, and the upper limit of one-year LPR corresponding to ten-year securities of National Development Bank Securities is 3.85%. Although the overall interest rate level will rise at the bottom in 2021, it can be considered that the 10-year treasury bond range is about 3%-3.35% while that of National Development Bank Securities is about 3.5%-3.85%. The premise of this judgment is based on the continued economic recovery and inflationary pressures and the unchanged policy interest rates. The key point is whether the interest rate is raised.   The Central Bank’s key consideration is the gap after the economy deviates from the potential growth rate, which is assessed by inflation and employment. In theory, the technical requirement for raising interest rates is that the surveyed unemployment rate should return to be within 5%, and inflation (including CPI) is still high, hence the second quarter may not necessarily witness a rapid rise from the top and the third quarter is hardly promising.   Observed from the historical picture, in the second quarter of social financial decline and PPI rise, both risk assets and fixed income products were under some pressure. The bond market should balance the asset allocation from the perspective of coupon rates and determine the upper limit based on the bottom line thinking so as to delimit the margin of safety because the left side may be very long and it is not recommended to "beat the gun".   Disillusionment and Rebirth — The Outlook on the Credit Bond Market Speaker: Yao Yu, founder of YY Rating   Core points of view: The turning point of the credit bond market has come. The previous illusions have been shattered and the market is looking forward to the rebirth.   The credit bond market has gone through more than 7 years since Shanghai Chaori Solar Energy Technology Co., Ltd. defaulted. In the context that the scale of defaults continues to rise, private enterprises have gradually achieved the equilibrium of supply and demand and the scale of state-owned enterprises' defaults has begun to rise. Apart from defaults, the rapid expansion of market discount transactions also reflects the impact on the market and investors' pessimistic expectations for the future.   Similar to the stock market, the bond market is also affected by both fundamentals and sentiments. Nowadays, mainstream institutions have been hit hard, hence the other institutions have begun to reflect on the logic of past investment and research, thus leading to a cliff in risk appetite. This trend has already begun and its impact will be far-reaching.   In the context of administrative deleveraging, market deleveraging, and macro deleveraging, credit bonds have entered the darkest phase.   Disillusionment — the disillusionment of the illusion. With the break of the rigid redemption, the areas that originally relied on the institutional dividends — the sinking of credit to obtain rigid redemption were falsified one by one; the rupture and even shattering of trust among and within institutions led to the continuous shrinkage of credit and the bonds of all sectors were sold. The illusion of external assistance has also been broken and financial institutions have become more of "prices". The differentiation of the market has made it difficult for the first and second levels and some issuers and investors are showing signs of gradual withdrawal.   The market is looking for a new balance during the process of collapse — rebirth. During the process of clearing, it is hoped that disorder could be changed into order, issuers can unload the burden, the market is stratified, investors are more rational, and risk pricing gradually matures.   During the process of reaching the day of rebirth, a more suitable credit strategy (defense + high-yield) should be adopted to make use of advantages and avoid disadvantages in the case of increased regional differentiation. Real estate research has also entered the deep end and the surplus sector has been suffering with the issuer. We should re-examine the past thinking of "faith investment" and analyze the fundamentals and the possibility of rescue from a more objective perspective to survive with the issuers who are likely to survive.   Credit research has once again returned to the origin of cash flow. I hope that investors can survive the difficult "disillusionment" stage and usher in a "rebirth".   Risks and Opportunities under the Differentiation of Industry Credit Risks Speaker: Qin Sichao, Executive Vice President of CSCI Pengyuan   Core points of view: The credit level of the coal mining industry is expected to weaken in 2021, that of steel will improve in the short term but its internal differentiation will increase, and the credit margins of automobile manufacturing and air transportation will improve. Specifically:   First, the concentration of the coal industry will continue to rise and output will gradually concentrate on large coal companies. The overall coal market will maintain a tight balance and the price center is expected to move up slightly. However, attention should be paid to problems like the coal companies with excessive debt burdens and weak cash flows and whether the refinancing of the industry bonds market can be recovered timely and effectively.   Second, under the carbon peak policy of the steel industry, the supply side is expected to shrink slightly in 2021. With the support of the downstream demand side, steel prices may increase based on stabilization. Driven by industry policies and spontaneous demand, mergers and reorganization will continue to increase the concentration of the industry, the revenue will mainly flow to the top steel companies, and the credit differentiation of individual steel mills will be further intensified.   Third, under the support of short-term factors in the automobile industry, automobile sales are expected to increase in 2021. Meanwhile, structural differences will increase the proportion of medium and high-end models with a high proportion of profits, which will improve the industry's profit margins.   Fourth, with the gradual mitigation of the epidemic, the revenue of the air transport industry will rebound in 2021 and the airlines’ losses will be significantly reduced and gradually turned into profits. The improvement of the cash flow will reduce the pressure on funds, the debt ratio will stabilize slightly after a continuous decline and continue to fall, and the industry's credit level will be generally improved.   The Credit Risk Outlook on the Bond Market in the New Situation Host: Li Yong, President of CSCI Pengyuan Guests: Zhou Yue, Chief Fixed Income Analyst of Zhongtai Securities Research Institute Wang Haoyu, Managing Director, Head of Research Institute, and General Manager of Derivatives Department of First Capital Huang He, Senior Vice President of Fixed Income Research Department, China Southern Asset Management Chen Zhixin, Deputy Director of the Research Group, Fixed Income Department, Bosera Funds   Summary of guests’ opinions: In 2020, in response to the COVID-19 epidemic, fiscal and monetary policies were relatively loose, the level of issuance fell, and the cost of issuance dropped significantly. As the domestic epidemic situation was under control, monetary policies gradually returned to be prudent in the latter half of 2020, liquidity margins tightened, bond issuance differentiation gradually increased, and issuance interest rates ended the downward trend of the former half of the year, especially the market interest rate center that significantly increased due to the defaults of Brilliance Auto and Yongmei Group. It is expected that credit bond issuance interest rates will be further differentiated in 2020 and the low-level entities’ difficulty in refinancing will increase significantly.   The defaults by high-level state-owned enterprises have had a significant impact on the market. The beliefs of state-owned enterprises have begun to falter, especially in areas where fiscal strength is expected to be weak, and the government's ability to support regional enterprises has increased uncertainty in the context of declining revenues. The situation of state-owned enterprises has been quickly cracked. This is the development trend of policies and markets. From investors to issuers and other participating institutions, it is necessary to reassess corporate risks. Investors' risk appetite may be reduced in the short term, further strengthening financing differentiation. The risk of urban investment companies is still dominated by tail urban investment. The executive meeting of the State Council proposed that "government leverage should be reduced", mainly to reduce the government's implicit leverage, which will have a certain impact on the refinancing of urban investment companies, which will further intensify Urban investment risks.   In 2020, "gray swan" events happened in the market including the defaults of Brilliance and Yongmei and the bankruptcy of “Shenyonggong”, which caused investors to suffer losses to a certain extent. However, the clearing of risks is still going on, especially in the current economic situation with still many uncertainties where most companies are still under financial pressures. Building decoration, public utilities, transportation, and automobiles that have been affected by the epidemic need to pay attention to the concentration of maturity pressure and refinancing capabilities while the financing of coal, steel, chemical, and other industries that have been significantly affected by risk events still facing certain financial pressure despite that their prices have risen. In these industries, the companies with unimproved revenue and profits, tight cash flow, and greater short-term debt repayment pressure this year need to be vigilant about their credit risk exposure.   In face of the market “reshuffle”, rating agencies will focus on the companys’ credit characteristics when conducting risk assessments. The phenomenon of government support in Shanxi, Hebei, and other provinces can be regarded as short-term behaviors under special circumstances. In the long run, breaking the rigid redemption will be a market trend. The disposal of default bonds and the construction of the investor protection system and the trading mechanism of risky bonds are all accelerating. What we will see is that with the implementation of the registration system, risk subjects will become more diversified. With the gradual improvement of the system, the actions of all parties shall be carried out under the constraints of the system. Defaults will be an important way of risk release, which is like the finish point of one party and the starting point of the other.