On the run from China? Credit crunches are lurking everywhere in emerging markets



Tired of the standard drama of Chinese real estate developers, global investors sought safe havens elsewhere. They come away disappointed. Credit crises are lurking in every corner of emerging markets, and the latest fears are no less dramatic.

Earlier this month, Heungkuk Life Insurance Co. in South Korea, bond investors confused with a surprise decision not to cancel the $500 million perpetual bond. Panic sales spread far beyond Seoul. Even perpetuals issued by Hong Kong-listed AIA Group, a well-run insurer with an A+ rating from S&P Global Ratings, collapsed.

The obscure Korean insurer had opened a Pandora’s box. It challenged an unspoken market convention that financial firms would always redeem their perpetuals on their first call date, even if the decision doesn’t make economic sense. Heungkuk changed his mind a week later amid a wider sale.

As Heungkuk’s drama unfolded, investors began to wonder whether Korea, a generally quiet space where about 76% of outstanding credit has a single-A or higher, is also experiencing a crisis. Legoland Korea, a theme park operator, defaulted on its commercial paper in late September; the national corporate bond market contracted its most ever in October; and corporate credit spreads are at their highest in a decade. Heungkuk’s surprising move could be a sign that, like Chinese companies, Korea Inc. loses access to refinance its loans.

The core of the emerging credit crisis in Korea appears to be a financing problem. In April 2020, regulators allowed banks to relax their liquidity coverage ratios so they could boost lending to the Covid-hit economy. But when Korea reopened and Seoul lifted its emergency measures, banks have been seeking funding, offering higher rates on time deposits and changing the way they lend money. For example, according to data from Bank of America Merrill Lynch, lending to the insurance industry is slowing dramatically.

Vietnam, often hailed as the next China, is seeing its own version of a developer scare. Builders struggle to get loans and sell bonds after the arrest in early October of Truong My Lan, the chairman of real estate conglomerate Van Thinh Phat Holdings Group. A convertible issue from No Va Land Investment Group tumbled on media reports that the country’s second-largest publicly traded builder is restructuring its business.

While I was there on a reporting trip in August, it became clear that Vietnam, like China, was forming its own real estate bubble, and a regulatory crackdown was in the works. From people’s love of real estate, to the practice of pre-sales, to developers’ poor corporate governance, Vietnam shares too many similarities with China for Hanoi’s comfort.

This may explain why investors are turning back to Chinese developers as soon as there is concrete news about Beijing’s support. For those looking for bottom fishing, dollar bonds issued by Chinese high-yield builders have already lost two-thirds of their value this year. Meanwhile, the rest of the emerging markets are not looking prettier.

For years, global investors knew that China Evergrande Group swam naked. What they didn’t know, and are beginning to discover, is that many other developing countries are as daring swimmers as the Chinese builders.

More from Bloomberg Opinion:

• China’s Real Estate Development Demons Stalking Vietnam: Shuli Ren

• Seoul tragedy to put a very unpopular leader to the test: Geroid Reidy

• Vietnam is growing by 7%. It could be much better: Shuli Ren

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist on Asian markets. She was a former investment banker and was a market reporter for Barron’s. She is a CFA charter holder.

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