The most striking financial news emanating from China in recent weeks has been the seizure by a US investor of a prized asset owned by Evergrande, the collapsing Chinese real estate giant. The asset seized was a sprawling residential development called “Venice” on the Yellow Sea coast near Shanghai. The US investor was distressed debt specialist Oaktree, a $161bn asset manager run by Howard Marks.
Marks is known for not shying away from bare-knuckle fights with delinquent companies and rival creditors. But this deal has a wider significance. Marks’ progress in claiming ownership of the Venice development runs counter to a narrative that China is becoming increasingly uninvestable, especially to foreign investors.
The restructuring deal, under which Oaktree took ownership of the Venice development after Evergrande defaulted on a $400mn secured loan, is likely to have had approval from senior levels of China’s government. It shows that, in some market segments at least, Xi Jinping’s China is prepared to allow important roles for foreign capital.
Marks himself sounded upbeat in comments to the Financial Times. “I personally believe China wants to be a member of the world financial community. And I think that desire will inform its actions,” he said. “I hope I’m not being Pollyanna . . . but, so far, there’s been no evidence to the contrary that we cannot count on the rule of law.”
Such optimism contrasts sharply with the broad distress being felt in China’s $870bn offshore debt markets. Chinese borrowers defaulted on a record $13.3bn in offshore bonds last year, according to Bloomberg data, sharply constraining a crucial US dollar funding channel for Chinese property developers. Foreign funds are key investors in the offshore bond market.
The progress made by Oaktree as an onshore investor in securing the Venice development’s assets should not be taken as a sign that the woes being felt by foreign investors in China’s torrid offshore bond markets are at an end. But they do send important signals that Beijing is not opposed to foreign investment where it needs it. If Oaktree’s deal near Shanghai is resolved successfully, it will show China’s law can be used to good effect in debt resolution markets.
The fortunes of the onshore and offshore investors differ starkly. While most of Evergrande’s foreign creditors are likely to recover just pennies on the dollar on their $20bn of offshore bonds, Oaktree could bank a windfall of more than $200mn if it is able to sell the assets it now controls.
The Venice deal is not the only one that Oaktree has pulled off. It also took control of a project in Hong Kong codenamed “Project Castle” after Evergrande defaulted on $600mn it had borrowed from Oaktree. Evergrande’s chairman, Hui Ka Yan, had planned to build a Versailles-style mansion on the site in Hong Kong’s northern wetlands.
The successes so far of Oaktree in Shanghai represent the optimistic case for foreign capital in China. This optimism is broadly shared by foreign portfolio investors, who poured a net $65.5bn into equities listed in Shanghai and Shenzhen last year. That was in spite of an unpredictable regulatory crackdown that depressed the share prices of some consumer internet companies favoured by foreign investors.
China should make greater efforts to be clear to foreign and domestic investors what its policy priorities are. So far, it appears that Beijing’s guiding philosophy is to privilege those foreign investors who bring their money onshore over those that invest in offshore bonds and Chinese equities listed in New York and other overseas markets. If this is so, it should say so — clearly.