Core Viewpoint - The Chinese credit market is experiencing a significant shift as credit risks and spreads have reached historical lows, driven by a combination of value imbalance, policy changes, and debt cycle dynamics [1][2]. Group 1: Value Imbalance - The ratio of credit spreads to LPR spreads fell below 50% in the second half of 2024, leading to a disappearance of capital gain expectations [1]. - Institutional investors, such as banks and insurance companies, are shifting towards long-term interest rate bonds due to the imbalance in value, resulting in a sharp adjustment in the credit bond market [1]. - This institutional behavior has intensified the differentiation within the credit market, highlighting the severe inadequacy of overall credit spread value [1]. Group 2: Policy Dynamics - Since the initiation of the debt reduction policy in 2015, credit spreads have been on a long-term decline, but the policy focus has shifted towards urban investment transformation rather than debt reduction itself as of September 2024 [2]. - The next three years will see the completion of implicit debt replacement, leading to a reduction in policy support and a transition into a policy bottom phase for the credit market [2]. - The decrease in debt reduction funds and the advancement of urban investment transformation are gradually diminishing the factors that mitigate credit risk, necessitating attention to the survival pressures of tail-end entities [2]. Group 3: Debt Cycle Context - In the context of a global debt crisis, China has adjusted earlier due to pressures from real estate and local government debt, with credit risk pricing at historical lows [2]. - However, the pressures from external demand contraction and urban investment transformation are increasing actual tail-end risks [2]. - As the largest industrial nation globally, China’s reliance on external demand is facing challenges, while the push for urban investment transformation exacerbates credit risks for tail-end entities [2].

1. Report Industry Investment Rating No information provided in the report. 2. Core Views - Currently, the valuation fluctuations of AVIC Industry Finance reflect liquidity risks rather than credit risks. Given the low short - term actual default risk, there are opportunities to trade at high valuations [1][2][11]. - The yield under this phased shock is approaching its peak, and it has allocation value for proprietary accounts with stable liability ends and allocation accounts with few restrictions [3][14]. - As bonds gradually mature and are redeemed, market concerns will subside, and bond prices will gradually return to normal [2][11]. 3. Summary by Relevant Catalogs 3.1 AVIC Industry Finance Bond Trading Situation before and after Resumption - On April 23, 2025, AVIC Industry Finance issued a bond resumption announcement. The matter of off - exchange redemption of the company's bonds failed to pass the vote of the bondholders' meeting, and the relevant bonds resumed trading on April 24 [1][10]. - In the past week, the overall trading prices were mainly at a discount, with short - term varieties within 2 years being the main trading terms. Longer - term bonds declined more, and bonds within one year had relatively small fluctuations. On the first day of resumption on April 24, the average deviation from the valuation was 195bp; on the 25th, it was 77bp, and the deviation amplitude converged; on the 28th, the trading volume was 2.4 times that of the previous trading day, and the average deviation from the valuation rebounded to 107bp [2][10][13]. - Taking "22 Industry Finance 02" as an example, from April 14 to April 23, the bond valuation showed a slight upward trend. On the first day of resumption on April 24, the valuation increased significantly by 208bp, and it has been relatively stable in the past three trading days [2][11]. - AVIC Industry Finance has the credit endorsement of AVIC Group. With the high - level control of central - enterprise bond default risks and the support of the central - enterprise credit guarantee fund, and the company's positive attitude towards debt repayment, the default risk is likely to be controllable [11]. 3.2 Market Fluctuation Observation of Other Similar Companies - The total outstanding bond scale of the parent companies of trust - holding companies is 8.93 trillion yuan. After excluding several large state - owned and joint - stock commercial banks with high outstanding bond scales, the remaining balance is 1.43 trillion yuan [4][20]. - From March 31 to April 27, 2025, after the AVIC Industry Finance incident, the bond spreads of Minmetals Capital (Minmetals Trust) widened significantly. However, due to the strong individual specificity of the AVIC Trust issue, the valuation fluctuation risk of Minmetals Capital is controllable, and it is expected that there will be no actual credit risk disturbance [4][20].

Summary of Key Points from the Conference Call Industry or Company Involved - The conference call primarily discusses the bond market and credit bonds in China, focusing on the macroeconomic environment and monetary policy implications for the second quarter of 2025. Core Points and Arguments 1. **Market Funding Trends**: In Q2 2025, the market funding center is expected to seek a new equilibrium, with funding rates significantly rising compared to Q4 2024. This shift will favor credit bonds as the cash-out leverage strategy stabilizes [2][10][11]. 2. **Central Bank's Stance**: The central bank's cautious approach is a key focus, with expectations of fiscal supply expansion and potential changes in monetary policy due to external factors like tariffs and U.S. de-globalization [2][10][11]. 3. **Bond Market Volatility**: The bond market is anticipated to exhibit high volatility and a fluctuating market characteristic, with single-sided bull market expectations diminishing. The overall market is leaning towards a fluctuating market due to existing debt repayment pressures [2][17][19]. 4. **Credit Bond Opportunities**: Q2 presents significant opportunities in credit bonds, with a supply-demand mismatch expected. The current yield of over 2.3% on existing bonds is attractive compared to the previous year [2][21][28]. 5. **Fiscal Stimulus**: The necessity for increased fiscal stimulus is highlighted, as relying solely on monetary policy is insufficient to address core issues like insufficient credit demand and negative GDP deflator [2][13][14]. 6. **Investment Strategies**: In a high-volatility environment, strategies focusing on credit bond arbitrage and leveraging are more effective. Multi-asset strategies are recommended to enhance returns [2][19][26]. 7. **Local Government Bonds**: 2025 is identified as a significant year for debt resolution, positively impacting local government bonds. Plans to issue 2 trillion yuan in replacement bonds are underway, with 1.3 trillion already issued in Q1 [2][28][29]. 8. **Market Dynamics**: The market is characterized by a flattening yield curve, with short-term bonds showing stability while long-term bonds face challenges. The overall market environment is set for a return to normalcy in funding centers [2][5][18][20]. 9. **Credit Risk Monitoring**: Attention is drawn to potential credit risks, especially with a rise in performance warning announcements that could lead to rating downgrades [2][50]. 10. **Investment Recommendations**: Recommendations include focusing on high-yield credit bonds, particularly those with strong fundamentals and short to medium durations, as they are expected to perform better in the current market conditions [2][51][53]. Other Important but Possibly Overlooked Content - The impact of regulatory changes on the credit bond market, particularly regarding the introduction of credit bond ETFs, which could enhance liquidity and attract more investment [2][25]. - The historical context of different funding phases and their implications for investment strategies, emphasizing the importance of adapting to market conditions [2][27]. - The potential for local government support in the bond market, particularly through land reserve special bonds, which could provide additional funding avenues [2][29].

Summary of Key Points on Chinese Dollar City Investment Bonds Industry Overview - The Chinese dollar city investment bond market has undergone multiple development stages, closely linked to the opening of China's capital markets and policy adjustments, with five main phases identified: initial stage (1993-2009), rapid development (2010-2014), explosive growth (2015-2017), fluctuating development (2018-2021), and regulatory adjustment (2022-present) [2][7][3]. Current Market Status - As of February 2023, the total outstanding amount of Chinese dollar city investment bonds is approximately $70 billion, covering over 400 bonds across 24 provinces, municipalities, and autonomous regions [5][3]. - The eastern coastal provinces, such as Zhejiang, Shandong, and Jiangsu, dominate the market, accounting for nearly 50% of the total issuance, indicating regional concentration risk [3][5]. - The average coupon rate for these bonds is around 5.28%, with significant variations across provinces; regions with better credit ratings have lower rates, while weaker regions face higher rates [6][3]. Issuance and Financing Trends - From 2020 to 2024, the issuance volume of Chinese dollar city investment bonds has fluctuated significantly, with net financing showing a downward trend, particularly in 2022, where it dropped to negative values [11][12]. - The issuance in 2024 shows a rising trend, but net financing remains negative, indicating limited new financing primarily used for refinancing existing debts [12][14]. - The total repayment amount for these bonds from 2025 to 2027 is estimated to be around $45.4 billion, with 2025 being a critical year for repayment pressure, particularly for Zhejiang, Shandong, and Jiangsu [15][18]. Regional Disparities - There are notable differences in issuance amounts and average coupon rates across different regions in 2024, with Zhejiang leading in issuance and having a lower average rate compared to other provinces [14][3]. - The western and central regions have lower issuance volumes but have seen significant growth in recent years, reflecting their urgent need for dollar-denominated loans to support infrastructure projects [5][20]. Risk Factors - The short-term maturity structure of these bonds, with over 57% having a remaining term of 1 to 3 years, poses significant repayment pressure in the near term [8][16]. - The concentration of repayment obligations in economically developed eastern regions raises concerns about liquidity and potential credit risks, especially if local fiscal conditions deteriorate [5][19]. Market Performance - The secondary market for Chinese dollar city investment bonds has shown strong performance, with a significant annualized increase in high-yield bond indices compared to investment-grade bonds [21]. - The yield trends indicate a downward trajectory, with the yield on these bonds decreasing despite fluctuations in the Federal Reserve's interest rates [22][23]. Future Outlook - The outlook for the Chinese dollar city investment bond market remains cautious, with potential repayment pressures and regional disparities likely to influence future issuance and investor sentiment [15][18][24]. - Investors are advised to be vigilant regarding credit risks, particularly in weaker regions, while also considering the potential for attractive returns in high-yield segments [24][25].

Core Viewpoint - The convertible bond market in China has entered a technical bull market, with the China Convertible Bond Index reaching a new high since June 2015, driven by strong demand and limited supply [1][3][4]. Market Performance - As of March 17, the China Convertible Bond Index rose to 438.41 points, marking a significant increase of over 20% since September 2024, indicating a technical bull market [1][3][4]. - Nearly 50% of convertible bonds have seen a cumulative increase of over 20% since September 2024, with some bonds like Fuxin Convertible Bond and Outong Convertible Bond experiencing gains exceeding 200% [4][5]. Supply and Demand Dynamics - The convertible bond market is experiencing a supply-demand imbalance, with a reduction in the overall stock of convertible bonds due to strong redemptions and an increase in near-term bonds, while new issuances remain low [6]. - Institutional investors, including insurance funds and public funds, are increasing their allocation to convertible bonds in a low-interest-rate environment, contributing to the demand [6]. Valuation Outlook - The valuation of convertible bonds is expected to remain high due to anticipated scarcity in supply by 2025, with estimates suggesting a reduction in the stock of convertible bonds to around 650 billion yuan [8][9]. - The current price levels of certain convertible bonds are approaching those seen in 2021, raising concerns about potential overvaluation, but many institutions believe the pricing is justified given the market conditions [8][9]. Market Trends and Risks - The convertible bond market is closely tied to the performance of the equity market, particularly in the technology sector, which has shown significant gains this year [11]. - Investors are advised to be cautious of high volatility in the convertible bond market, especially if there is a shift in market style from growth to value stocks [11][12].