It’s never a good thing when a corporate story revolves around yachts worthy of a James Bond villain. From 1980s insiders to 1990s Russian oligarchs to Malaysian fugitive Jho Low, these maritime metaphors of ostentatious excess make uncomfortable headlines when the music stops.
Welcome to the 2021 Hui Ka Yan as Chinese regulators and investors circle her 60-foot superyacht at a time her group China Evergrande struggles to dodge rocks.
It’s the centerpiece of roughly $ 485 million in luxury asset bonds that Hui could sell to cover Evergrande’s debt payments. Instead, Hui chose to delay some recent bond coupon payments, causing rough seas for global markets.
Hui’s yacht is named, wait for it, “Event”. What an event it was indeed to see China’s most indebted real estate developer turn into default. And so that the little ones, like Fantasia Holdings Group, renounce the payment of the debt. Investors are now worried about Kaisa Group Holdings, which Friday was suspended from Hong Kong trade. The developer missed recent payments on wealth products he guaranteed.
Kaisa is in some ways the zero patient of China Inc. In 2016, he became the first Chinese manufacturer to default on dollar bonds. A dubious honor that no mainland company wants on its Wikipedia page. Today, it is the 27th Chinese developer in terms of sales, but the 3rd in dollar debt with an outstanding amount of more than 11 billion dollars.
Now Kaisa says she is under “unprecedented pressure on her liquidity” as real estate markets collapse and rating companies report problems in Asia’s largest economy. And it’s a sign that the turmoil that’s plaguing Evergrande, Fantasia, Kaisa and who knows who else is a symptom of China’s problems, not the underlying cause.
As is often the case, many observers look at China’s 2021 through the lens of the bad debt crisis in Japan in the 1990s. The biggest parallel is that Chinese regulators, like those in Japan 25 or 30 years ago, treat the symptoms of excess, not the forces behind it.
Obviously, neither the Chinese leadership nor Kaisa’s management internalized the big lessons of 2016. Or, for that matter, those of the collapse of the Chinese stock markets in the summer of 2015.
The 2015 episode was the first real crisis of the Xi Jinping era, the one that began in 2012. In a few weeks between July and August 2015, Shanghai stocks plunged 30%. It sent a wave of panic around the world, with markets from Tokyo to London to New York staging powerful sales. Analysts have cited a “Minsky moment” for China as its credit and debt-fueled rise ends badly.
That never happens, of course. Chinese financial firefighters managed to extinguish the blaze. As central bank rates fall, regulators have relaxed restrictions on leverage, halted initial public offerings, reduced reserve requirements and suspended trading for thousands of listed companies. They went so far as to allow average people to use apartments as collateral to buy stocks. Beijing has launched a public relations campaign to characterize the purchase of shares as a patriotic act.
The chaos is over, but the imbalances simmering beneath the surface remain. The 2021 protest is a series of default scenarios in China’s largest domestic industry. Representing a third of China’s growth, the country’s real estate sector is equivalent in size to the entire Japanese economy of $ 5,000 billion.
This touches on the zombie question that Chinese skeptics have been asking for a long time. Make it a $ 5,000 billion question.
Some call it “Japonisation”, this dreaded scenario when an economy falls and cannot recover via conventional monetary and fiscal tools. China, of course, has revived again and again with great effect over the past 25 years. He circumvented the Asian crisis of 1997 with enviable skill. It avoided the worst of the 2008 global crisis and the “taper tantrum” of 2013. It is one of the first major economies to recover from the Covid-19 era.
Yet China is still more about quantity of growth than quality. Despite all the talk from Beijing about major reform, China is still far too dependent on exports and rising real estate values to ensure stable or productive growth.
To be sure, Beijing’s crackdown on big tech and real estate is aimed at reducing risk and excessive debt. But too much of that focus is on the top down, not the bottom up.
China’s real vulnerability is not Jack Ma’s Ant group, Ma Huateng’s Tencent Holdings, or Cheng Wei’s Didi Global. The real threat is the real estate giants of the old economy who are preparing a subprime crisis with Chinese characteristics. Those run by the superyacht are drowning in more debt than China Inc. can handle.