Recent reports of a possible economic collapse in China owing to its inflated property market are a reflection of private investor worries and wider concerns about regulatory overreach.
“It’s pretty traumatic for investors who are heavily invested in property, development projects, or private developers such as Evergrande,” Timothy Tsui, director of single family office Arbutus, told AsianInvestor.
“We are now seeing what happens when there is a credit crunch and an erosion of confidence among certain lenders. Individuals are exposed to this overleveraging are seriously worried about their money.”
NOT TOO BIG TO FAIL
Retail investor capital was used to lend money to trust companies who made collateralised loans to private real estate developers.
“We are talking about thousands of people, and that is only to one company, one single developer. I’m guessing there is more exposure from retail products indirectly,” said Tsui.
There is a risk of more social unrest if these regulatory issues are not handled properly, Tsui said. “A mishandling of the creditors may create panic in the investor community that has exposure to other private developers or other private business enterprises in China.
“However, I do not expect a full bailout, because that sends the wrong message, that too-big-to-fail private enterprises can overborrow and expect a bailout from the state.”
Andy Rothman, chief strategist at Matthews Asia, agreed there is “almost no chance” that Evergrande will be bailed out. “I think there is going to be significant government intervention to prevent liquidity problems from cascading into an insolvency problem. But that is different from a bailout, because there will be haircuts and pain for the equity and bond investors,” he told AsianInvestor.
The heightened tension about China among private investors has spread to the fund management community.
After US fund giant BlackRock launched a range of funds in August to be marketed directly to mainland Chinese investors – the first foreign fund firm to do so – veteran financier George Soros published a piece in the Wall Street Journal saying BlackRock’s move was “a tragic mistake”.
He warned the firm it is likely to lose money for its clients and damage the national security interests of the US.
Soros pointed to the cancellation of Ant Group’s IPO last year and China’s moves to curb the ride-hailing firm Didi after its New York listing, as examples of China turning domestic policy into a foreign policy issue.
There was little in the way of support for this view, however, from other fund managers. Paul Marshall, co-founder of hedge fund managers Marshall Wace, did say in a letter to clients that US-listed stocks of Chinese companies had become “uninvestable” because of the lack of certainty on how China may interfere in their operations.
But Carlos von Hardenberg, another industry veteran and co-founder of Mobius Capital Partners, said that despite the regulatory clampdowns, divesting from China would be “a gigantic mistake”.
Another manager told AsianInvestor: “I think whoever wrote that piece for Soros has no idea what’s going on in China.”
“You can be upset about the way Xi Jinping governs, and about the lack of political freedom and narrowing space for personal expression, but connecting that to these financial issues doesn’t make a lot of sense,” he added.
The government’s micro-management extends to the education sector being turned to non-profit and the video games industry having curbs placed on it.
The clampdown continued on the unregulated capital movement, with the outlawing of cryptocurrencies in late September. “This is extremely serious,” Tsui said, while questioning how China’s substantial crypto investment community will continue to operate.
“They’ve shut it down, but that doesn’t surprise me,” said Rothman.
“If you believe one of the key selling points of crypto is to create a shadow currency that the government doesn’t have much visibility into, then it was never going to be tolerated.”
Rothman is fairly relaxed about the current unrest and uncertainty. "For me, the main point right now is that by and large the policy objectives the Chinese government has in mind are sensible. They are trying to reduce financial risks across the economy and protect small firms from monopolistic practices. These are all things that we’ve been talking about in our own countries for many years. The Chinese have just been more aggressive in acting on it lately."
He acknowledged that there are going to be implementation problems. “That means there will be periods of extreme volatility, but the trick for an investor is to ask: Is this the doom and gloom or is this transitory short-term volatility, and do I feel comfortable?”
Tsui too, is personally not worried. His family is not exposed directly to Evergrande and the real estate the family owns was bought from 2005 to 2010.
“We do have holdings in multiple cities in China, but they were cash buys made at the very beginning of the property boom, so having the market correct 20% or 30% doesn’t matter to us."
For foreign investors in distressed situations like Evergrande, his message is: “Get as much money as you can, while you still can. Because we are moving towards a bankruptcy situation and we don’t expect a bailout, so you may have to wait for years to seeing anything, if you see anything.”