Mispriced risk

 Chinese assets are too expensive given the level of risk in the country, delegates heard at the Private Debt Investor Asia Briefing 2013 in Hong Kong in November.
 “Chinese assets in general, and loans in particular, are mispriced for risk,” Jake Williams, deputy group chief risk officer at Standard Chartered Bank, said on a China-focused panel at the event. “Part of that is [down to] the dominance of the local banks, who don’t price for risk at all as far as I can see. So it is quite hard to do business onshore in China, especially with the state-owned enterprises.” 
 According to Williams, there’s still a premium charged to borrow – and returns are not commensurate with the risks involved.  
 Moreover, while the enforcement situation has improved to some extent in China (particularly on the equity side), debt investors are not well-protected, because contracts remain difficult to enforce in bankruptcy situations, panelists agreed.  
 There was some optimism that this long-standing issue is finally starting to be addressed.  
 “There are certainly areas where it has improved – Shanghai in particular – where you’ve got young judges, many of whom can speak good English and are keen to do the right thing and adopt the principles in the Enterprise Bankruptcy Law,” explained Neil McDonald, a partner at Hogan Lovells. 
 However, while judges are more open-minded, there are many stakeholders in distressed situations in China – and inevitably the local government will be one of the most significant.   
 “You end up with courts in the better jurisdictions who may be willing to try to do something a little bit better, but are frankly and bluntly told, ‘Sorry, you can’t do this – you need to toe the party line’. Access to justice in the more remote areas, where we are doing deals more and more, remains very problematic.” 
  Anthony Holmes, principal at LVF Capital, went one step further: he said his firm doesn’t even bother with enforcement processes in China. “Our approach has been never to attempt to enforce by the courts. If you end up in that situation, we think you’re in a lose-lose position,” he said.  
 Standard Chartered’s Williams agreed: “We don’t frankly trust the courts system.” 
 All of which makes China less attractive to investors, especially since the US offers better returns as well as substantially lower risks. As McDonald put it: “A lot of the clients that I work for, particularly the East Coast bond market in the US, just don’t get that risk.” 
 There’s a similar problem in India, according to Sarit Chopra, managing director of mezzanine and alternative solutions at Standard Chartered, who was speaking on a separate panel. The number of non-performing loans in India is growing as local banks reduce their lending and growth rates stress businesses with heavy debt loads. But pricing remains a problem. 
 “There is a huge opportunity that is developing in India,” he said. “But the issue that we come across is the way the risk/ reward is being priced in India – it is very difficult to get around. There are a lot of Indian local funds, which are essentially just trapped [rupee] funding that don’t have the perspective of the region, and seem to be driving yields down.” 
 There’s clearly an opportunity in credit in Asia; panelists and delegates alike all agreed on this. But in light of the increased risk – notably around the lack of investor protection – the market is unlikely to take off until risk is re-priced at a more realistic level.