HAVING WATCHED VARIOUS bubbles expand in global capital markets since the financial crisis, the recent re-emergence of the China property bubble gives me the most pause.
I had thought the cooling measures put in place by China’s financial authorities three years ago had definitively done their trick and any subsequent price appreciation would be iteratively measured and slow.
I was wrong. And thanks to gains in the high 20%s in Shanghai and Beijing and around 40% in some of the other top tier cities, the asset class that dared not speak its name – offshore China property debt – is back again as if the wobble never happened.
Indeed, developer Country Garden managed to print its lowest offshore coupon, a miserly 5%, just a few weeks back, smashing through the 7.5% it had achieved with its last dollar foray just over 18 months ago.
If anything was required to show China property bonds are back in vogue, it was this deal, which came just ahead of the latest US Fed policy meeting and was well supported by private bank clients. Perhaps they know something I don’t.
I would like to have heard the sales pitch: no doubt the usual private bank leverage of up to 35% was offered to high-net-worth clients for the privilege of booking the paper.
Presumably they didn’t heed the recent warning of China’s richest man Wang Jianlin, who believes China’s property market is witnessing the inflation of a dangerous bubble
PRESUMABLY THEY DIDN’T heed the recent warning of China’s richest man Wang Jianlin, the owner of real estate and entertainment conglomerate Dalian Wanda. Wang believes China’s property market is witnessing the inflation of a dangerous bubble, whereby the market’s bifurcation in favour of the bigger cities is masking the problems elsewhere, with reams of newly developed property left unsold in the country’s smaller cities.
Indeed, Mr Wang has been spending his time steering his company away from real estate and towards a focus on its entertainment portfolio, with a recent purchase of Hollywood studio Legendary Entertainment to the tune of US$3.5bn adding to other US entertainment assets he has accumulated over the past few years.
He wasn’t alone in seeking to make a big switch out of the Chinese property market and to cash in on its glory years by reinventing. Hui Ka Yan of developer China Evergrande had the same thinking in seeking to transform the Hong Kong listed-company from property developer to something else; in this case to a consumer goods conglomerate, via a large investment programme that saw the company take stakes in a ream of non-core businesses.
Evergrande is nothing if not colourful. I recall the drama of a company called Citron Research claiming in an “independent research note” around four years ago the company was essentially insolvent and engaged in fraudulent practices, including bribery.
Citron’s owner Andrew Left sold Evergrande’s stock short, and it worked; he sent the stock down 20% in a day. Mr Hui did not take kindly to the attack, warning the penalty for spreading untruths in China is death, and nor did Hong Kong regulators.
A recent ruling from Hong Kong’s Market Misconduct Tribunal found Left guilty of market misconduct. No punishment has yet been fixed, but Mr Left will doubtless be thankful Mr Hui’s words came to nothing.
What’s interesting about Mr Hui’s approach to business is that after batting for a full-scale change of his company’s business model he now appears to be rushing straight back into the China property market again. This partially comprises the purchase last month of a chunky holding in mainland real estate rival China Vanke, the country’s biggest developer in sales terms.
That might be the right thing to do in the context of China’s re-expanding property bubble, but it comes in a different context to the way things were in 2014 when he set about forging a different route for the company. Debt has ballooned at Evergrande to around four times common equity.
I WONDER JUST how this latest property frenzy will play out for the big players who are mostly sitting on similar metrics to Evergrande.
A likely outcome from where I sit is there will be a rash of “pay-to-play” debt purchases made by the bigger companies by taking stakes in the debt of their smaller rivals. For those such as myself with long memories, it bears contemplating that back in 2011 the due 2018s of Country Garden were trading at a yield-to-maturity of 25%. A similar price point had been reached just as the global financial crisis was in full bloom.
And yet we recently saw a 5% print on a 7 NC 4 bond from that very issuer. The ratings downgrade dynamic is in full swing in Asia and you would have to be a super bull of China real estate to not imagine we could easily revisit those stratospheric yield levels again.
Far from buying each others’ equity I imagine the only way to play the bursting of the new China property bubble will to be to purchase some senior secured debt in your rival and try to get your hands on a big chunk of their equity during a restructuring.
After that, you can get on with your new business of selling movies and widgets to the Americans.