Analysis |  Fleeing China?  Credit crises lurk everywhere in emerging markets

Analysis | Fleeing China? Credit crises lurk everywhere in emerging markets


Global investors fed up with the default drama of Chinese property developers have sought safe havens elsewhere. They leave disappointed. Credit crises lurk in every corner of emerging markets and the latest scares are no less dramatic.

Earlier this month, South Korea’s Heungkuk Life Insurance Co. rocked bond investors with a surprise decision not to call its $500 million perpetual note. The panic selling has 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, fell.

The obscure Korean insurer had opened a Pandora’s box. He challenged an unspoken market convention that financial companies would always redeem their perpetuals on their first redemption date, even if the decision makes no economic sense. Heungkuk changed his mind a week later amid a massive sell-off.

As the Heungkuk drama unfolded, investors began to wonder whether Korea, a generally calm space where around 76% of outstanding credit is rated A and above, is also experiencing a crisis. Legoland Korea, a theme park operator, defaulted on its commercial paper in late September; the country’s corporate bond market experienced the largest contraction on record in October; and corporate credit spreads are at their highest in a decade. Heungkuk’s surprise move may well be a sign that, like Chinese companies, Korea Inc. is losing access to refinancing its borrowings.

At the heart of Korea’s emerging credit crisis appears to be a funding problem. In April 2020, regulators allowed banks to loosen their liquidity coverage ratios so they could increase lending to the Covid-hit economy. But as Korea reopened and Seoul lifted its emergency measures, banks found themselves scrambling for funding, offering higher rates for term deposits and changing the way they lend. Credit to the insurance sector, for its part, is experiencing a drastic slowdown, according to data compiled by Bank of America Merrill Lynch.

Vietnam, often hailed as the next China, is seeing its own version of developer fear. Builders are struggling to secure loans and sell bonds after the arrest in early October of Truong My Lan, the chairwoman of real estate conglomerate Van Thinh Phat Holdings Group. A convertible issue by No Va Land Investment Group fell after media reported that the country’s second-largest listed builder was restructuring its business.

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

This perhaps explains why investors return to Chinese developers as soon as there is concrete news of support from Beijing. For those looking to fish the bottom, dollar bonds issued by high-yield Chinese automakers have already lost two-thirds of their value this year. Meanwhile, the rest of emerging markets don’t look any prettier.

For years, global investors have known that people like China Evergrande Group are swimming naked. What they didn’t know, and are beginning to discover, is that many other developing countries are as bold swimmers as Chinese builders.

More from Bloomberg Opinion:

• Chinese property development demons stalk Vietnam: Shuli Ren

• The Seoul tragedy to test a deeply unpopular leader: Gearoid Reidy

• Vietnam posted growth of 7%. It can do much better: Shuli Ren

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.

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