The Chinese economy is slowing down, and it is not at all clear there is an easy path to recovery. There is a substantial list of corporations facing shutdown, led by Evergrande and others in the real estate business. Evergrande accounts for roughly one-third of Chinese gross domestic product, and others, such as Modern Land (China), and Fantasia defaulting on debts. The Chinese reently offered to swap overdue bonds from Yango Group for new issues, but the outcome was still uncertain. Several smaller companies have defaulted recently, and Evergrande’s final outcome will not be known for several months. Dictator Xi will be running for a third term, and decisions will have to be made on the Beijing Winter Olympics. Under the circumstances, it will be some time next year before the outcomes of these teetering egg shells will be known.
But these outcomes will not be sunny ones. Many, if not most, of the delayed settlements are delayed because of political reasons, not because of hard facts. The Yango Group offer, for example, came wrapped in gift foil, and the Group asked international investors to swap $747 million of dollar debt for new bonds, blaming its usual financing channels for the cash shortage. It seems that Yango is not accountable for its failure to make scheduled payments, and time is required to reschedule new payments.
As the Wall Street Journal wrote on Tuesday, “Tighter government policy, credit issues and deteriorating sentiment have temporarily shut down” various refinancing methods and put great pressure on our short term liquidity, in the words of Yango leaders.
The Yango offer was not very hot. A bond that matures in 2024 is currently selling for less than twenty cents per dollar, and early in the week none of the major companies had published an opinion on Yango Group’s proposal.
Evergrande is the biggest name out there, but few expect to hear meaningful news about the future of the company in the near future. Meanwhile, China is unlikely to do anything melodramatic, giving the United States a much-needed breath of fresh air. One can well anticipate an easing of tension between the two superpowers, and even a bit of arms control. Yango’s third quarter income dropped 18% compared with a year ago, a significant fall.
And so we wait.