Xi Jinping’s China finds itself ‘at the point where the rubber hits the road,’ said Bob Lyddon
China’s volatile economy is now at a point “where the rubber hits the road”, leaving UK banks HSBC and Standard Chartered vulnerable, as well as car manufacturer Land Rover, a financial expert has warned.
Bob Lyddon was commenting after a Hong Kong court ordered China Evergrande, the world’s most heavily indebted real estate developer, to be liquidated. The move followed a failed effort to restructure £236billion owed to banks and bondholders, with concern rising about the superpower’s rising debt burden
Mr Lyddon, founder of tax consultants Lyddon Consult, told Express.co.uk: “This now a point where the rubber hits the road, a point that HSBC and Standard Chartered and many others hoped would not occur.
“We could hark back to previous pieces where the senior management of HSBC and Standard Chartered gave out emollient phrases like that the worst was over and problems were an inevitable and minor pothole to be negotiated.
“In the past, I’ve said that the Chinese authorities need to prove that we weren’t back in pre-Revolution days where foreign bigwigs could put Chinese citizens on the street.”
A court has ordered Chinese property giant Evergrande to be liquidated
So far the authorities in China, led by President Xi Jinping, had been happy to “let things take their course in the hope that things would improve of their own accord”, delaying and diverting legal proceedings along the way.
He continued: “Now that approach has failed and those proceedings have come very close to home.
“They now need to take a more active line ie to take a decision to do or not to do something.
“Do they decide to allow the mainland Chinese courts to take decisions they regard as not in China’s (ie the Party’s) best interests?
LandRover could be vulnerable, warned Bob Lyddon
“Or do they intervene, influence the judgement in their favour and show that the courts are not independent, deterring foreign investors across the board?”
Either way the direction of prices (for example, bonds, shares and real estate) was inevitably downwards, which would increase bad debts owned by banks including HSBC and Standard Chartered, Mr Lyddon pointed out.
In addition it would affect the values of numerous types of holdings of assets which were Chinese, or Asia/Pacific or strongly linked to the Chinese economy, for example German auto manufacturers and UK-based LandRover, he added.
Turning his attention to the real estate giant, Mr Lyddon continued: “Evergrande CEO Shawn Siu has told Chinese news outlet 21Jingji that ‘the order affects only the Hong Kong-listed China Evergrande unit’, but this is not how other commentators see it.
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HSBC’s Canary Wharf headquarters
“They have the order being made against the main holding company – China Evergrande Group – although this company is incorporated in the Cayman islands, it has its headquarters in Guangdong in mainland China, and the group’s assets appear to be owned in the main by two subsidiaries in mainland China: Hengda Real Estate Group Co, Ltd and Tianji Holding Limited.”
The applicants for the winding-up order – the holders of the £3.7billion 8.75 percent bonds issued by China Evergrande Group – had sued in Hong Kong because of its “England-like legal system” and the consequent higher likelihood of their winning the case, Mr Lyddon explained.
He continued: “The reason the Hong Kong courts accepted jurisdiction is that China Evergrande Group’s shares are listed in Hong Kong.
“Now a liquidator will be appointed and their first task will be to enforce the winding-up order in mainland China and possibly the Cayman Islands as well.”
The bond was guaranteed by the Chinese subsidiaries and in due course winding-up orders could be obtained against them, although such a move could fail if the Chinese courts resist enforcement.
Mr Lyddon said: “The Cayman Islands courts would be more likely to accept enforcement but that is not where Evergrande’s assets are.
“The bondholders do not have specific security on a named set of buildings, nor do they have a general security such as a fixed-and-floating charge, so they will have to hope that the liquidator does obtain control of all of the assets in mainland China of Evergrande, Hengda and Tianji, and that these assets can be sold to first fully reimburse other creditors who have a better claim (such as on a specific mortgage) and second to leave something for the bondholders.
“That is a very long road, and has roadblocks along it such as the Chinese authorities not wanting to see local creditors being steamrollered by foreign ones – the Communist Revolution was supposed to stop that – or Chinese citizens being evicted, or Chinese citizens who have made prepayments on partly-built property losing their money.”
Mr Lyddon concluded: “This is a very important test for the Chinese authorities, of whether foreign creditors enjoy the same kinds of investor protections as in an open Western economy, or whether political considerations will rank higher. So far the Chinese authorities have acted with singular ineptitude, and such dilatoriness is frequently followed by a clunking-fist reaction.”
Speaking on Monday, Judge Linda Chan said it was appropriate for the court to order Evergrande to wind up its business given a “lack of progress on the part of the company putting forward a viable restructuring proposal” as well as Evergrande’s insolvency.