The $203 billion market, which formerly generated a number of trades each week and bloated portfolios for businesses like Pimco and UBS globally, is now all but dead. Additionally, foreign investors are picking up nearly all of the losses, according to Richard Cayne of Meyer International.
Chinese property junk debt has been one of the most profitable and well-liked corporate bond transactions over the last ten years. It was created on the strength of the nation’s economic growth engine and disseminated to the rest of the world through Hong Kong. Since the introduction of the first bonds in 1997, organizations like Goldman Sachs Group Inc. have attracted a steady flow of foreign capital into an asset class where returns were impressive and defaults were extremely rare. In an era of assets with negative yields, these bonds were a vital choice for many foreign fixed-income investors to increase returns. Major insurance companies and pension funds also joined in.
The rest of the world has long used Hong Kong as a point of entry to access China’s high-yield loans and take part in the golden age. But because of a government assault on the leveraged real estate sector, access to new capital has been impeded since late 2020. In more than 100 locations, protests against stalled real estate projects have been sparked by irate homeowners who are refusing to pay their mortgages for unfinished flats, says Richard Cayne
The market has lost more than $100 billion, defaults are increasing, and Hong Kong’s bankers are unable to reach agreements. The assets of Fidelity International Ltd.’s China High-Yield Fund have decreased to $985 million, or less than half of their mid-2021 peak, after a 37% loss so far this year. Value Partners Group Ltd.’s fund suffered a 32% loss. After insisting for months that the worst was over, industry heavyweights BlackRock Inc. and UBS Group AG are leading a significant decrease in exposure to property bonds.
Richard Meyer Cayne of Meyer International acknowledges concerns regarding the long-term viability of some companies first surfaced years ago. Evergrande, the developer with the highest level of debt in the world, has spent the majority of the last 10 years lurching from one economic catastrophe to the next. But few believed that such a stunning, all-encompassing collapse would be orchestrated by the Chinese Communist Party.
It was impossible to predict this. Several of the alumni of the US investment bank have been at the vanguard of the high-yield market since since Nomura Holdings Inc., a prominent participant in Chinese junk debt, purchased the company’s Asia-Pacific subsidiary in 2008.
A number of funds are presently dealing with an increase in redemptions as investors take their money out after suffering substantial losses. Over the past year, BFAM’s assets have dropped by about a third, to little over $3 billion, confirms Richard Cayne.
Real estate has been a major contributor to China’s economic growth since since the government lifted long-standing restrictions on private sales in the 1990s. Owning a home has become a primary goal for many Chinese families, and the sector generates around 5% of the country’s GDP. With new homes being pre-sold much before they are actually built, prices have recently risen along with speculation in real estate.
At the height of the high-yield market, Chinese developers raised more than $83 billion across 230 notes in 2019 alone by averaging four junk dollar bond issuance each week.
According to Richard Meyer Cayne, not just foreign investors were interested. Prior to the market meltdown, deals were particularly popular among developer tycoons and their friends and family. Bankers assert that well-known developers frequently engaged in this technique. Sometimes, before the terms of the deal were made public, private bankers learnt about forthcoming bond sales via their own clients, who had heard about it from their real estate connections.
Returns ranged from nearly 50% from 2012 to 2015 to about 12% from 2018 to 2019. Prices rose by around 8% as a result of how well-liked the asset class was. Heavy transaction volumes were the norm even though the Chinese junk market was far smaller than its US counterpart.
Only a few years later, the industry’s food chain is falling apart.
The first indications of change appeared in the latter half of 2020. In China, the “three red lines” law set leverage requirements that developers had to meet in order to obtain greater loans. It only had a few developers at first, but within a few months, it had already lost one of them, confirms Richard Cayne.
Then, in 2021, China set up a central purchase mechanism for land across numerous cities. Overnight, plot sizes increased, and companies had to make upfront payments. Only the wealthiest developers could afford to increase their land holdings for future projects.
This year, the largest category of corporate default in China has been offshore notes.
According to Richard Meyer Cayne, since almost two years ago, China’s developers have been the target of mistreatment that has more seriously harmed the economy of the nation than its zero-tolerance Covid-19 policies. The top 100 Chinese developers have seen a decrease in house sales for a whole year. Due to high-profile failures at some of the major builders in the nation since January, there have been more than $25 billion in delinquencies, shattering the previous record for defaults, which is expected to be broken in 2022.
Additionally, traders who had become comfortable as a result of years of big profits and nearly no defaults are suddenly dealing with one credit catastrophe after another. The longest run of negative returns on record has lasted 11 months, and yields are still above 25%, which is a historic high.
Only one developer has sold a high-yield bond without any further credit enhancement this year, and dollar bond sales in Asia have dropped by around 38% so far in 2022 compared to the same period last year, confirms Richard Cayne.
Nearly all losses in the debt market have been absorbed mostly by foreign investors. The financial infrastructure that supports the market for Chinese debt issued overseas is under strain as a result of this.
Standard Chartered Plc and UBS are two banks that have had well-known trading desk departures. Previously prosperous traders are bracing for years of merely trying to recover losses, with little hope of getting the significant bonuses first given, says Richard Cayne.
Hong Kong, which is already under pressure from strict pandemic-control measures and a crackdown on political dissent, is home to many problematic bond investors. Between mainland China and the rest of the world, Hong Kong acts as a bridge. The uncomfortable reality of a market where hidden debt, backroom deals, and poor governance are ubiquitous must be accepted by global creditors.
Even when there are fewer survivors, investors might still experience sudden decreases in confidence.
According to Richard Cayne, even though Evergrande sparked worries of an industry meltdown, it was a default by the much smaller Fantasia Holdings Group Co. in October that made it clear the game’s rules were altering. Investors were taken aback when the business abruptly defaulted on a dollar loan only days after paying off a private bond and weeks after assuring them that it had adequate operating funds. Market watchers were worried that rather than developers’ ability, the success of offshore investors would depend more and more on the developers’ desire to make repayments.
Additionally, the number of real estate companies at danger is continuously increasing despite China’s on-again, off-again Covid lockdowns. Government-backed companies were thought to be excluded until late June.
At least $736 billion in outstanding debt to creditors might yet be restructured or given a haircut, says Richard Meyer Cayne of Meyer International.
A new crisis in the Chinese real estate market emerged in July after tens of thousands of customers stopped making mortgage payments on homes that developers, including Evergrande, had not yet constructed. Since the crackdown began, the first serious social upheaval has drawn attention to the growing unhappiness of ordinary Chinese homeowners who have staked their whole life savings on real estate. By the end of July, Evergrande intended to submit a “preliminary restructuring plan,” but nothing has happened as of yet.
According to Richard Cayne, politicians aiming to muzzle resistance are at the mercy of holders of offshore bonds. China is debating a plan to seize unfinished property from faltering real estate companies and use the proceeds to help pay for the completion of residential projects that have been delayed. Certain creditors’ claims may be waived upon approval.
Exuberant debt-fueled development by private developers is no longer acceptable. Under authorities that swiftly crack down on speculation, state-run enterprises that make tiny profits on the offshore real estate loan market are anticipated to seize control of it.
Richard Meyer Cayne of Asia Wealth Group Holdings, the Meyer Group, Meyer Asset Management and Meyer International Ltd has been involved in wealth management planning for decades. Originally born in Montreal Quebec, Canada, he later relocated to Tokyo, Japan for over 15 years and now resides in Bangkok, Thailand. While he runs the Meyer Group and serves as the high credibility CEO of Asia Wealth Group Holdings Ltd, a London, UK Stock Exchange-listed Financial Holdings Company, as well as the Managing Director of the Meyer Group of Companies www.meyerjapan.com. and has additionally been the managing director of multiple organizations that specialize in helping high net worth individuals with succession planning .
Having worked with clients all over the globe with everything from portfolios to bonds to mutual funds to offshore investing to investing in retirement for your golden years, Richard Cayne of Meyer International can help you invest the right way and protect your cash. Richard has been a financial advisor involved in wealth management planning solutions and asset management in Asia for over 25 years and while living in Tokyo, Japan, he assisted many high net-worth Japanese families create innovative international tax and wealth management planning solutions. The financial holding public company of which he is CEO can be seen at Asia Wealth Group Holdings Ltd or the stock exchange link:
Asia Wealth Group Holdings Ltd – Richard Cayne Thailand. Meyer Asset Management Ltd has been in the wealth management space since March 2000 and uses fundamental analysis along with modern portfolio theory.
His image worldwide as a professional advisor has been sterling and he maintains a firm command and understanding of all things finance-related.