July 30, 2017, 12:00 PM EDT
In China, taxi rides arent just a form of transportation any more. Theyve also become useful forbond buyers doing due diligence. Dining out at restaurants is also helpful.
Its all part of a boom in field trips by market participants coming to grips with a new reality in China: the potential for bond defaults. After decades when authorities effectively provided blanket assistance to keep troubled companies from going under, the Communist leaderships focus on shuttering unproductive assets has upended the market.
A total of 45 onshore corporate bonds have defaulted since the start of last year, a surge from the eight recorded in 2014 and 2015 — which themselves were the first since the market was established in the 1980s. While China has the worlds third-largest bond market, corporate financial transparency can be limited, forcing investors to get creative.
If you just sit in the office, you would never know if an issuer has actually closed business, said Xu Hua, a money manager and deputy head of research at Colight Asset Management in Shanghai. When you go to the local places, be sure to have a chat with taxi drivers or restaurant customers after talking to the issuer — ask them if they have friends working for the company. Has their friends pay been cut or raised this year? Has the company delayed paying salaries? Whats the local reputation?
Recent incidents have showcased concerns about corporate governance and disclosure standards.The onshore bonds of two China Hongqiao Group Ltd.units slumped in March after theworlds biggest aluminum maker said full-year results may be delayed because of issues raised by its auditor. Bondholders of China Shanshui Cement Group Ltd. are still trying to recoup most of their money — at one pointthe company said it couldnt repay interest without a company seal.
Read more about the list of excuses used by defaulting Chinese firms.
A lot of information about Chinese bond issuers isnt disclosed; when they do, the quality of the information may be unreliable, said Christopher Lee, Hong Kong-based managing director of corporate ratings at S&P Global Ratings.
Onshore market players are finding themselves traveling a lot more nowadays, across the worlds third-largest nation by geography. Xu at Colight, one of the top-rated private fund firms for fixed-income strategy by the official China Securities Journal last year, says his team has even ventured as far as Xinjiang — a central Asian region 4,000 kilometers from Shanghai.
The research team at Bosera Asset Management Co., Chinas fourth-biggest money manager, has ramped up its on-site visits since the start of last year, to an annual pace of 70 to 80 currently, according to Chen Zhixin, head of fixed income research in Shenzhen. Their counterparts at the countrys largest fund manager, Tianhong Asset Management Co., have roughly doubled their on-site visits compared with a couple years ago.
Given the many explosions of credit risk in 2016 and this year, more road trips became critical, said Cheng Shixiang, a fixed-income researcher in Beijing at Tianhong, which oversees 1.5 trillion yuan ($222 billion) of assets. His teams grass-roots researchincludes talking to locals about the bond issuers.
If its a property company, we would interview people around its projects and ask nearby real-estate brokers if the projects have been involved in any financial dispute, Cheng said. He and his colleagues also gather intelligence from local banks.
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Thats a contrast with fund managers abroad, who have an abundance of informationreadily available about companies selling bonds. In addition to publications like quarterly earnings reports, they can tap the research of investment bank analysts, along with articles in the media and specialty trade publications. And issuers themselves are typically active in communicating with investors, saysWang Ying, a senior director in Shanghai at Fitch Ratings.
Few Chinese issuers initiate such communication with bondholders, she said. Its more toilsome to be a Chinese bond investor — but without those toils, you may step on a land mine and end up with a loss of money.
With assistance by Judy Chen
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