Categorically shafting lenders to Chinese companies will drive out even the diehards

Welshcake

welshcake@acuris.com

The Evergrande saga shows that credit investors need to watch for dangers that are not clearly signposted

A two-week sojourn in the Greek islands was supposed to be my chance to relax. After all, it is one of the few places that can claim to have given almost as much to the modern world as Wales. But beset by a lingering cold — the first I can recall since lockdowns began — thoughts succumbed instead to epic warfare, the machinations of the gods, and all-destroying sea creatures from the deep. All of which feel pertinent to the Q4 credit market.

It hasn’t helped there was a sizeable earthquake on Crete soon after I left. Or that I read extensively about WWII’s Battle of Crete, the Greek Revolution of 1821, and a mega tsunami caused by the Minoan eruption of 1600 BCE. Or that I surveyed in Athens the lasting damage wrought by a stray 17th century Venetian cannonball on the Parthenon. (The scaffolding is still up.)

On my Aegean snorkel trips, I kept expecting a Ray Harryhausen kraken to rear its head from behind the rocks — or that this is how the Greeks would apprise me. One blissful escape from such visions was, ironically, while swimming next to an inquisitive octopus for half an hour — much longer than most people can abide my company. I guess underwater nobody can hear your opinions.

More troubling was my experience in a fishing village on Sifnos. The only neighbouring tourist, a Brittany aficionado from Paris, was swimming happily through the crystal clear water when his sudden cries of anguish informed me this otherwise idyllic cove was full of jellyfish. Of course, I showed the utmost solidarity by hightailing it out of there as fast my flippers would go.

Prospects of violence, volatility, rising tides, Olympian interventions and stings in the tail out of the clear blue is right where portfolio management is going in October. During the Hellenic uprising against the Ottomans exactly 200 years ago, Percy Bysshe Shelley wrote (at some remove it must be said): “We are all Greeks”. This rings true today in credit, where the delta of fund outflows versus rising treasury bond yields vies as oracle with the gamma of volatility spikes wielded by a menagerie of fantastical foes.

It’s all very well making careful plans around agreed factors such as inflation, rate hikes and asset purchase tapering. But you should forgive them upstairs for laughing as monsters like Evergrande, the US debt ceiling, spending bills and a Chinese power crackdown rain fire from the skies.

Much of this could be old hat by the time you read it, and totally ignored as a contributor to sentiment — or it could have laid waste to the acropolis. That’s the whole joke.

Case in point, Evergrande panicked markets for a whole day. Rather than the spectre of a global real estate meltdown, it embodied the irony of China’s determination to impose centralised control against any hint of a free-for-all. Beneath Evergrande’s decline is how China allowed the industry to expand and then sharply undermined it.

China has pursued bans not only on ‘irresponsible’ cryptocurrencies but any growth market where foreign investors are involved. Crypto investors are becoming inured to China fear, uncertainty and doubt (fud). Every few months there’s a new ban on trading and the market sells off for a bit, although less each time.

Befuddled by fear, uncertainty and doubt

Credit investors are clearly getting regular China fud. But the country has to decide if it really wants to play this game, because every time it perpetrates a longer lasting fud on itself. Letting Evergrande customers and local investors suffer to satisfy foreign investors sits at odds with China’s aspirations to promote moderate prosperity for all. But completely burning international buyers of debt, as seems to be the plan with Evergrande at time of press, feels akin to the Dubai crisis of 2009 — and think how long it took investors to venture back to the Gulf.

Lenders to Chinese companies have been willing to put up with low levels of transparency. But categorically shafting them in such a big, public way will drive out even diehards. If this is what centralised finance is like in China they’d be better off buying Dogecoin.

Don’t even get me started on the US debt ceiling though... How many times has this been the Armageddon suddenly upon us? I’d rather marvel at how the Greeks formed an enduring empire while wearing sandals. My feet are killing me!

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Global credit funds & CLO's

October 2021 | Issue 239

Published in London & New York.