Upfront
OPINION INTERNATIONAL FINANCING REVIEW ASIALocalised risks
A
delayed payment in a remote corner of northwest
China has not suddenly made bonds from China’s
LOCALûGOVERNMENTûlNANCINGûVEHICLESûAûRISKYû
proposition. They always have been.
China has showed repeatedly that it is prepared to let
issuers fail, either to cut capacity in overgrown industries or
simply to rein in wayward corporate bosses. Recent defaults
in the state-owned sector have made that abundantly clear,
and investors would be foolish to assume that the entire
LGFV sector is somehow immune.
In the midst of a damaging trade war with the US,
#HINAûDOESûNOTûWANTûTOûSHAKEûINVESTORûCONlDENCEûORûHARMû
economic growth – which might explain why the LGFV
in Xinjiang managed to get its hands on some money two
DAYSûAFTERûDECLARINGûAûDEFAULTû3TILL ûITûWOULDûBEûAûMISTAKEûTOû
assume that deleveraging is over. If the US lifts its tariffs,
OTHERû,'&6SûTHATûRUNûINTOûlNANCIALûDIFlCULTIESûMIGHTûBEû
allowed to fail.
4HEûREALûCHALLENGEûFACINGûINVESTORSûISûlGURINGûOUTûWHICHû
BONDSûAREûATûRISKû!SûTHINGSûSTAND û#HINASûCURRENTûMARKETû
infrastructure does a poor job of differentiating between
credits. Pricing rests almost entirely on expectations of state
support, rather than credit fundamentals, and puny trading
VOLUMESûMEANûTHEûSECONDARYûMARKETûOFFERSûNOûGUIDE ûEVENû
when a credit event does occur. With recovery rates still
largely untested, investors often need to go in on blind
faith.
#REDITûRATINGSûSHOULDûBEûTHEûKEYûTOûTHEûSOLUTIONû
Unfortunately, they are part of the problem. So many of
China’s onshore bonds are rated Triple A that investors
have no way of telling good from bad. And allegations of
DIRTYûTRICKSûASûTHEûVARIOUSûLOCALûAGENCIESûCOMPETEûWITHûEACHû
OTHERûHAVEûSAPPEDûCONlDENCEûINûCREDITûSCORES
China does at least seem to be aware of the problem.
$AGONGûHASûBEENûHANDEDûAûONE
YEARûBANûFORûCONmICTSûOFû
interest between its ratings service and consulting business
over four months from November 2017 – a period when
MANYûBORROWERSûWEREûSTRUGGLINGûTOûMAINTAINûMARKETûACCESSû
in a severe liquidity squeeze.
4HATûKINDûOFûACCOUNTABILITYûISûTOûBEûAPPLAUDED ûBUTûITû
does not go far enough. Once US-China trade tensions
SUBSIDEûANDû#HINAûGETSûBACKûONûTRACKûWITHûITSûDELEVERAGINGû
CAMPAIGN ûINVESTORSûWILLûBEûBACKûTOûGUESSINGûWHEREûTHEûNEXTû
axe is going to fall.Public or private?
T
WOûCARûMAKERSûONûOPPOSITEûSIDESûOFûTHEûWORLDûAREû
playing out a debate that rages in every fast-growing
company: when is the right time to go public?
%LONû-USK ûTHEûCHARISMATIC ûOFTENûUNPREDICTABLEûHEADû
of US-based Tesla, has landed himself in trouble with the
SECURITIESûWATCHDOGûOVERûHISûHALF
BAKEDûPLANûTOûTAKEûTHEû
company private. At the same time, Chinese electric car
MAKERû.IOûHASûKICKEDûOFFûAû.EWû9ORKûLISTINGûTHATûCOULDû
fetch close to US$2bn.
There are good arguments for both options. Private
COMPANIESûHAVEûTHEûFREEDOMûTOûGROWûANDûRElNEûTHEIRû
business models without the scrutiny of quarterly earnings
REPORTS ûWHILEûTHEûPUBLICûMARKETSûOFFERûGREATERûBRANDING û
PROlLEûANDû
ûINûTHEORYû
ûHIGHERûVALUATIONS
)FûTHEûPRIVATEûMARKETSûCANûCOMPETEûONûVALUATION û
companies have little incentive to go public. Recent
EXAMPLESûSUGGESTûTHATûISûINDEEDûTHEûCASE ûWITHûTHEûLIKESûOFû
5BER û7E7ORKûANDû!IRBNBûALLûPREFERRINGûTOûREMAINûUNLISTEDû
for now. There is certainly private money for Chinese
COMPANIES ûTOO ûASûTHEûLIKESûOFû$IDIû#HUXING û"YTEDANCEûANDû
DJI can attest.
!û4ESLAûBUYOUTûATû-USKSûTOUTEDû53BNûVALUATIONûWILLû
ONLYûUNDERLINEûTHEûAPPEALûOFûPRIVATEûlNANCEûIF ûOFûCOURSE ûITû
ever happens.)
4HEûTROUBLEûWITHûPRIVATEûMARKETS ûHOWEVER ûISûTHATûTHEYû
tend to evaporate in times of trouble, when nervy fund
managers naturally gravitate towards tradable, liquid
securities. And while an unlisted company may be able
TOûOPERATEûWITHûMOREûmEXIBILITY ûPRIVATEûlNANCINGSûAREû
NOTORIOUSLYûINmEXIBLEû)NVESTORSûTYPICALLYûDEMANDûEXCESSIVEû
dilution in a down round, and will always have one eye on
an exit - that is, another IPO.
Tesla’s founder has grown tired of ‘bonehead’ analyst
QUESTIONSûANDûMOANEDûABOUTûSHORTûSELLERSû"UTûTHEûCOMPANYû
HASûMADEûFULLûUSEûOFûTHEûPUBLICûMARKETSûSINCEûITSûû)0/ û
raising more than US$7bn from follow-on share sales and
convertibles. Short sellers have been especially helpful in
capital raisings, too, not to mention how many are simply
HEDGINGûTHEIRû#"ûINVESTMENTS
Nio is at a much earlier stage, having delivered fewer
than 500 vehicles so far, compared to Tesla’s over 200,000.
The Chinese start-up, however, is not far off where Tesla
was before its own listing. That suggests a public listing at
THISûPOINTûWOULDûBOOSTûITSûPROlLEûANDûCREATEûAûLONG
TERMû
platform capable of funding further growth - as long as its
chairman can stand the scrutiny.The real challenge facing
INVESTORSûISûlGURINGûOUTû
WHICHûBONDSûAREûATûRISK