British investors could unwittingly be sucked into China’s real estate crisis, a UK-based expert has warned.
Bob Lyddon was speaking after creditors of Country Garden Holdings Co, one of China’s biggest developers, appointed financial advisers to pave the way for debt talks over liabilities totalling £190billion.
Country Garden, whose chairwoman Yang Huiyan is one of the nation’s richest women, is among several major defaulted developers in the which has yet to offer a clear debt overhaul blueprint. At one point rated as an “investment-grade company”, its dollar bonds last year dropped below 10 cents.
Mr Lyddon, the founder of Lyddon Consulting Services, told Express.co.uk: “There is a lack of transparency as to who is at risk from the US dollar bonds.
“It probably is not banks, and I doubt whether UK people or businesses will have bought these bonds directly, but they could have bought them indirectly and may be unaware that they are at risk.”
However, he continued: “The horror story for the UK is if people and businesses find out that Country Garden bonds have ended up in one of their portfolios, and then that their scheme manager gets a valuation from the fund manager that over-values the bonds in the hope of making a big recovery, then the investor will get a nasty surprise somewhere down the line.”
The impact for the UK was “dampened somewhat” by the bonds being in US dollars but it remains a risk, Mr Lyddon stressed.
He continued: “These debts are in the form of bonds, and are likely to be held mainly by investment funds.
“Finding out who is ultimately at risk of loss is like delving into a multi-deck sandwich: Funds that are established in offshore locations where secrecy prevails, including somewhere like the Isle of Man; funds that invest only in other funds; funds that are invested in by arrangements like Self-Invested Pension Plans; funds used by other pension fund providers, insurance companies.
“The person at risk of loss may not even realise they are a holder of the bonds.”
Their exposure will have arisen if they had told their financial scheme manager, or whoever it is they give their instructions to, to invest in bond funds, China funds, Asia-Pacific funds, high-growth funds, real estate funds and foreign currency funds, he warned.
He added: “Country Garden bonds could be fitted any of those categories. In fact, if you had an organisation like Credit Suisse that underwrote the issuance of one of Country Garden’s US dollar bonds, and had many funds of its own, it could take on US$500 million of bonds and just ram $50million into each of 10 of its discretionary funds.”
What was currently happening in China, led by President Xi Jinping, was an example of “capital flight”, Mr Lyddon said, which he defined as “an indicator of extreme mistrust in both economic prospects, personal/economic freedom, and protection under the law”.
He said: “No-one could surely have deluded themselves that any private person or business enjoys protection under the Chinese legal system, given that China is a totalitarian state. Any liberalisation has existed at the whim of the Communist regime and, as we have seen under Xi, liberalisation can go into reverse gear.”
That in turn meant personal and economic freedom is not guaranteed, given China’s authoritarian regime mean people were not free to operate as they pleased, Mr Lyddon pointed out
He emphasised: “Current ‘freedoms’ are actually a temporary licence from the regime and one that can be withdrawn without notice and without due process.
“Which leaves us with the economic model and its prospects. Firstly, real estate has been a disproportionate contributor to China’s apparent prosperity. Now the bottom has fallen out of that market.
“Secondly, Western companies that invested heavily in China because it was cheap are discovering that there is such a thing as political risk: legal system risks, ability to transfer money out and so on. They have started to disinvest.”
Mr Lyddon concluded: “China is finding out that you cannot have prosperity and a totalitarian political regime. One or the other proves illusory, and breaks down, in the medium term.
“That is happening now because the Chinese regime does not want the inevitable threat to itself that derives from liberalisation: the creation of alternative seats of power.
“Instead it acts to eliminate the competing seats of power and in doing so faces the breakdown of the false prosperity it created.”
