SHANGHAI/HONG KONG: When the Shanghai-traded bonds of conglomerate China Minsheng Investment Group plunged 40 percent over two days in January after news it had missed a repayment, Beijing-based hedge fund manager Jash Zhang smelled blood.
The risky but potentially lucrative business of trading in bonds on the verge of default is in its infancy in China, almost as new as the phenomenon of corporate defaults in the state-run economy.A regulatory source said only a handful of other hedge funds have entered the trade, including Lanjing Investment, Colight Asset Management, Jing Tang Investment and Yongle Fund Management. The source declined to be named because of the sensitivity of the matter.
The emergence of vultures in China, spurred by a record number of delinquencies in 2018, could help improve liquidity in a corporate bond market that has traditionally been dominated by low-risk investors such as mutual funds, brokers and insurers. "The government did not really allow defaults to happen until about four years ago," said Ben Zhu, a Hong Kong-based distressed debt investor."As defaults spread, the bad apples get picked out. These companies will lose access to financing, and that's a good thing."
"The market consensus was that this company was cooking books. But we didn't think the problem was big enough to lead to an imminent default," Liu said."On an annualized basis, it's a return of several hundred percent. On an absolute basis, it was a gain of around 40 percent. And we bet heavily," he said."There's too much panic around defaults," said Zhou Li, president of Rationalstone Investment.