(Bloomberg Opinion) -- Good investment banking jobs are disappearing. Much of the business has been long replaced by machines and computer algorithms. Almost all equity trading is now done electronically. Even high-yield corporate bonds, an opaque corner of the market where orders from wealthy clients are often placed over lavish meals, are being disrupted. In the U.S., 37% of these transactions are conducted electronically, up from 21% in early 2019.
This year also witnessed China ruthlessly going after engines of job creation. The big tech crackdown and Beijing’s reluctance to allow its hottest unicorns to go public in New York are choking off viable career paths. For years, thousands of worker bees in Hong Kong served as a bridge between the two nations, connecting Chinese startups to American savers. That tie is being severed.
But not all is lost! There’s one last frontier where finance careers are safe from machines and autocrats.
I am talking about the world of dollar-denominated bonds sold by companies in emerging markets — especially China. They have proved surprisingly resilient to disruptive forces. In just five years, Chinese issues ballooned. There are now about $126 billion notes outstanding that offer at least a 7% coupon — off the charts in a world of near-zero benchmark rates. Everyone wants a slice, from global asset managers such as BlackRock Inc. and Ashmore Group Plc, to wealthy private banking clients at HSBC Holdings Plc and UBS Group AG. Credit hedge funds are also dabbling. And now, as defaults begin to accumulate, if doing day-to-day credit analysis on China’s real estate developers no longer appeals, you can go into distressed-debt restructuring instead.
Granted, machines can improve performance. Corporate debt is a lot more complex than stocks, and even the most savvy traders can’t keep track of all the yield curves. China Evergrande Group, for instance, has just one stock listing in Hong Kong but 13 dollar-denominated bonds outstanding (and another in the dollar-pegged Hong Kong currency) — with maturities ranging from 2022 to 2025 and from two issuing units that offer different degrees of guarantee. Computer algorithms that compare bond covenants and yield spreads can be immensely helpful.
However, a good trader with acute judgment is indispensable. Rumors abound, and what looks good on paper can turn into a sour lemon. Those with extensive networks within commercial banks and the real estate business are especially valuable. They are worth millions.
Case in point: Beijing-based developer Modern Land China Co. In mid-October, the company asked investors for a three-month extension to repay a $250 million bond due on the 25th. On paper, the offer looked good. Modern Land promised to buy back 35% of the bonds on the original due date and said its controlling shareholders would lend about $124 million to the company. The notes rallied. A week later, the company withdrew the offer and defaulted. Could computers have anticipated the hidden change of heart?
Or consider Evergrande. It became a defaulter not over its own bonds but a note it had privately guaranteed for a joint venture in which it held stakes. As we have learned, the big landmines this year were private bonds or private loans where the lending documents are unavailable to most mortals. In this murky world, humans’ reporting skills are far more valuable than computing power.
And there’s the need to decipher social media. China’s financial blogosphere is active and often has fast, first-hand information. But for fear of censorship, they don’t name names. For instance, a widely followed blogger, whose pen name can be loosely translated as “watermelon brother,” refers to China Huarong Asset Management Co. as “thick eyebrows, big eyes” — understood to be prominent facial features, reflecting the fact that until its latest restructuring, it was majority-owned by the Ministry of Finance. Ping An Insurance Group is the “orange factory,” perhaps because that’s the color of the company logo. Often, the blogger’s posts, dotted with “xxx”, are so cryptic I have to ask my smartest sources to interpret for me.
While the liquidity squeeze on developers has been brutal, Beijing has no interest in killing the offshore dollar bond market. After all, hundreds of local government financing vehicles, which do work similar to developers but have much worse financials, borrow there. For instance, Chongqing Nan’an Urban Construction & Development Group Co. does urban-renewal projects in the western metropolis, not unlike what Kaisa Group Holdings Ltd. does around its home base of Shenzhen. Meanwhile, investors will keep on coming back. The yield is just too high to ignore. This market is down, but not out.
Computer algorithms map out trends and seek outliers that are bound to converge. But here’s the beauty of investing in China — it’s still emerging and trying to figure out what it wants to be — so there’s no trend per se. Distressed debt investing will be hard work. There will be betrayal, heartbreak and haircuts. And that’s why it’s one last safe space where computers can’t replace humans.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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