Letter From Shanghai No 953 - No Winning Ticket

I’m told it’s fine to talk to your pot plants, but if your pot plant talks to you, then you should seek help. Similarly, in reading an article in the FT this morning entitled “Investors price in $130bn loss on Chinese developers’ dollar bonds”, as if I could speak to the traders and holders of these obligations, who expect repayment, I found myself muttering “that’s never going to happen.” In my experience, trading distressed debt is similar to a children’s game, where you want to get rid of all the cards you hold whilst trying to receive a card that, like a lottery ticket, will pay out. The game is essentially about trading hope. Should there be no winning card in the pack, there is no point in playing.

The FT outlines that a bond issued by the Kaisa group for a principle of $300m due on September 7th is currently trading at $0.09 per dollar. Shanghai-based Shimao Group has a $300m bond due next year, trading at $0.10, which is a $270m loss for someone. Indeed, the whole sector is nominally worth $200bn but is trading at $70bn, or $0.35 on the dollar. The point of holding these heavily discounted obligations is that someone somewhere at some time may honour their debts and pay out, therefore, any bond is a lottery ticket with considerable upside. But if it does not pay out, then it is next to worthless.

According to statements made on Wednesday following the State Council’s executive meeting chaired by Premier Li Keqiang concerning the economic situation, China will adopt 19 follow-up policies. The range of these 19 initiatives is extensive, including issuing a further CNY 300bn?($43.87bn ) in addition to the initial CNY 300bn of the policy-backed and development-oriented funds already issued.

However, as part of the intensified efforts to consolidate the foundation of economic recovery and growth, a number of task forces will be sent to the regions to supervise and assist in work to “promote economic stabilization and upturn, keep major economic indicators within the proper range and work for the best results possible”. Local governments will be allowed to adopt city-specific policies, including flexible credit loans to meet people’s basic housing needs and the need for improved housing conditions. But the key point is that the burden of stimulus will be implemented by local governments, and local government officials will be pressed hard to create growth and jobs and resolve housing issues before the 20th National Congress of the Chinese Communist Party expected in October.

The traders in the FT article are calling for the resolution of their debt issue, which would no doubt require the input of Beijing. However, one must expect while the resolution of the housing issue is being administered from a regional level, whose interest in paying international debts in USD will have little or no priority, distressed debt traders will have to consider that perhaps there is no winning ticket in the deck.??

Have a good day,

John