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PBOC Denies It Will Bail Out Collapsed Real Estate Developer While Chinese Property Developer Market Crashes | Zero Hedge

PBOC Denies It Will Bail Out Collapsed Real Estate Developer While Chinese Property Developer Market Crashes | Zero Hedge.

 

In yesterday’s most underreported story, which we noted first thing yesterday morning, China is on the verge of a second bond default just weeks after Solar cell maker, Chaori Solar, defaulted earlier this month, this time Zhejiang Xingrun (appropriately abbreviated ZX): a real-estate developer which just collapsed after its largest shareholder was arrested and which has some CNY3.5 billion in debt and furthermore the company was revealed to have been taking deposits from individuals offering interest rate between 18% and 36%.

 

But while Chaori was left to crash and burn, ZX may need a bailout for the same reason that we have always said China is desperate to keep kicking the can for as long as possible: any glimpse under the hood will reveal the true Chinese credit bubble nightmares, best summarized in the following: CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.” Which is why overnight the FT reported that none other than the PBOC was scrambling to bail out the lender in order to avoid the inevitable liquidation avalanche that will begin as soon as the realization hits just how far China’s non-existent collateral is stretched out.

 

From the FT:

Officials from the government of Fenghua, a town in eastern China with a population of about 500,000, the People’s Bank of China and China Construction Bank, which was the main lender to the developer, were on Tuesday thrashing out ways to repay the company’s Rmb3.5bn ($566m) of debt.

 

Not surprisingly, local government officials were keen to downplay Xingrun’s fate, which quickly added fuel to jittery markets after Chaori defaulted previously. The “situation is not that serious yet”, said a Fenghua local government official to the FT who only gave her surname Wu. Failure of a small property developer is not unusual in China or even in Zhejiang Province, where Xingrun is based. Well, it is if people start asking questions.

 

One can see why the local governments and administrators are eager to downplay the potential impact. As Bloomberg reported overnight, “some 66 percent of new Chinese developer dollar-denominated bonds sold this year are trading below their issue price amid the collapse of a private real estate company and news the housing market is cooling.” In other words, the Chinese housing market is suddenly the perfect receptacle for a lit default match to lead to an all out panic.

 

About $6.3 billion of notes in the U.S. currency sold by property companies including Guangzhou R&F Properties Co., KWG Property Holding Ltd. and Shimao Property Holdings Ltd. (813) have fallen in secondary market trade, according to data compiled by Bloomberg. Prices on Kaisa Group Holdings Ltd. (1638)’s 2018 8.875 percent debentures dropped to a seven-month low yesterday while Shimao Property’s $600 million of 8.125 percent notes due 2021 and sold to investors at par in January were trading at 97.646 cents on the dollar.

 

Demand for developer debt is waning after government officials familiar with the matter said yesterday Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The value of home sales in the world’s second-biggest economy fell 5 percent in the first two months of the year after local governments stepped up measures to curb rising prices. The 7.5 percent economic expansion targeted by China this year would be the slowest since 1990.

 

We’re cautious on property bonds short term, with the developers expected to report weaker year-on-year monthly sales data for March,” said Owen Gallimore, a Singapore-based credit analyst at Australia & New Zealand Banking Group Ltd. “For the majority of high yield property developers, January and February sales fell as tier three and four cities suffered from over supply and the smaller developers faced a credit squeeze.”

 

In other words, not only is the primary market frozen, but the secondary market is crashing further adding to the reflexive fuel that could be precisely the catalyst that unwinds the entire Chinese credit bubble:

 

China Resources Land Ltd. was the last company from China and Hong Kong to sell dollar debentures in Asia, adding $50 million to its existing 4.375 percent bonds due February 2019 on March 13.

 

The collapse in secondary prices comes less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. became the first company in China to default on its onshore corporate bonds.

 

All of this is happening as China is doing all it can (and has been for the past two years, without success) to cool its red hot housing market bubble, which unlike the US where the bubble is in the stock market, in China it is all about housing:

 

At least 10 Chinese cities stepped up measures to cool local property markets at the end of last year with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.

 

New-home price growth slowed last month led by Beijing, Shenzhen, Shanghai and Guangzhou, the four cities the government defines as first tier, the National Bureau of Statistics said today. Prices in Beijing and Shenzhen each rose 0.2 percent in February from a month earlier while they added 0.4 percent in Shanghai, the smallest increase since November 2012, and gained 0.5 percent in Guangzhou. Prices advanced in 57 of the 70 cities the government tracks, versus 62 in January.

 

Visually:

 

 

So all of the above would suggest the FT’s account of an imminent, if quiet, bailout of ZX is true. Turns out isn’t, and in fact the PBOC was so pissed it took to its Weibo microblog site to explain what really happened. As Bloomberg summarized, the Chinese central bank says it didn’t participate in an “emergency meeting held Tuesday” to discuss Zhejiang Xingrun Real Estate as reported by some unidentified media  according to a statement posted on PBOC’s official microblog account. PBOC is not involved in dealing with risks from the developer, according to the statement.

 

For the purists, here is the official statement via Weibo:

 

[Condemned individual foreign media untrue] March 18, individual foreign media reports, “China’s central bank to discuss emergency aid small real estate company,” inconsistent with the facts: First, the People’s Bank did not participate in the text referred to “convene an emergency meeting on Tuesday.” . Second, the People’s Bank of Zhejiang Xingrun not involved in the disposition of property-related risks. False reports to the media release behavior in unverified cases, the People’s Bank strongly condemned.

 

Well, it was google-translated, but the gist is clear.

 

So which is it: will China really let ZX fail and allow the second bond default in under a month to further slam the secondary bond (and much less relevant equity) market, while grinding the all important primary issuance market to a halt at precisely the time when credit creation in China is absolutely critical, or will the PBOC have been exposed as a liar once again.

 

Since the PBOC is merely a central bank, and thus lying is its bread and butter, our money is on the former, but one can only hope that in a world in which the Bernanke global put is now ubiquitous and perpetual, and the only investment calculus depends on the return/return analysis, that it will be “communist” China that finally allows risk back into the global investment equation.

 

And finally, putting it all into perspective, is our favorite chart showing bank asset creation in China and the US over the past five years. It needs no commentary.

 

 

PBOC Denies It Will Bail Out Collapsed Real Estate Developer While Chinese Property Developer Market Crashes | Zero Hedge

PBOC Denies It Will Bail Out Collapsed Real Estate Developer While Chinese Property Developer Market Crashes | Zero Hedge.

 

In yesterday’s most underreported story, which we noted first thing yesterday morning, China is on the verge of a second bond default just weeks after Solar cell maker, Chaori Solar, defaulted earlier this month, this time Zhejiang Xingrun (appropriately abbreviated ZX): a real-estate developer which just collapsed after its largest shareholder was arrested and which has some CNY3.5 billion in debt and furthermore the company was revealed to have been taking deposits from individuals offering interest rate between 18% and 36%.

 

But while Chaori was left to crash and burn, ZX may need a bailout for the same reason that we have always said China is desperate to keep kicking the can for as long as possible: any glimpse under the hood will reveal the true Chinese credit bubble nightmares, best summarized in the following: CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.” Which is why overnight the FT reported that none other than the PBOC was scrambling to bail out the lender in order to avoid the inevitable liquidation avalanche that will begin as soon as the realization hits just how far China’s non-existent collateral is stretched out.

 

From the FT:

Officials from the government of Fenghua, a town in eastern China with a population of about 500,000, the People’s Bank of China and China Construction Bank, which was the main lender to the developer, were on Tuesday thrashing out ways to repay the company’s Rmb3.5bn ($566m) of debt.

 

Not surprisingly, local government officials were keen to downplay Xingrun’s fate, which quickly added fuel to jittery markets after Chaori defaulted previously. The “situation is not that serious yet”, said a Fenghua local government official to the FT who only gave her surname Wu. Failure of a small property developer is not unusual in China or even in Zhejiang Province, where Xingrun is based. Well, it is if people start asking questions.

 

One can see why the local governments and administrators are eager to downplay the potential impact. As Bloomberg reported overnight, “some 66 percent of new Chinese developer dollar-denominated bonds sold this year are trading below their issue price amid the collapse of a private real estate company and news the housing market is cooling.” In other words, the Chinese housing market is suddenly the perfect receptacle for a lit default match to lead to an all out panic.

 

About $6.3 billion of notes in the U.S. currency sold by property companies including Guangzhou R&F Properties Co., KWG Property Holding Ltd. and Shimao Property Holdings Ltd. (813) have fallen in secondary market trade, according to data compiled by Bloomberg. Prices on Kaisa Group Holdings Ltd. (1638)’s 2018 8.875 percent debentures dropped to a seven-month low yesterday while Shimao Property’s $600 million of 8.125 percent notes due 2021 and sold to investors at par in January were trading at 97.646 cents on the dollar.

 

Demand for developer debt is waning after government officials familiar with the matter said yesterday Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The value of home sales in the world’s second-biggest economy fell 5 percent in the first two months of the year after local governments stepped up measures to curb rising prices. The 7.5 percent economic expansion targeted by China this year would be the slowest since 1990.

 

We’re cautious on property bonds short term, with the developers expected to report weaker year-on-year monthly sales data for March,” said Owen Gallimore, a Singapore-based credit analyst at Australia & New Zealand Banking Group Ltd. “For the majority of high yield property developers, January and February sales fell as tier three and four cities suffered from over supply and the smaller developers faced a credit squeeze.”

 

In other words, not only is the primary market frozen, but the secondary market is crashing further adding to the reflexive fuel that could be precisely the catalyst that unwinds the entire Chinese credit bubble:

 

China Resources Land Ltd. was the last company from China and Hong Kong to sell dollar debentures in Asia, adding $50 million to its existing 4.375 percent bonds due February 2019 on March 13.

 

The collapse in secondary prices comes less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. became the first company in China to default on its onshore corporate bonds.

 

All of this is happening as China is doing all it can (and has been for the past two years, without success) to cool its red hot housing market bubble, which unlike the US where the bubble is in the stock market, in China it is all about housing:

 

At least 10 Chinese cities stepped up measures to cool local property markets at the end of last year with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.

 

New-home price growth slowed last month led by Beijing, Shenzhen, Shanghai and Guangzhou, the four cities the government defines as first tier, the National Bureau of Statistics said today. Prices in Beijing and Shenzhen each rose 0.2 percent in February from a month earlier while they added 0.4 percent in Shanghai, the smallest increase since November 2012, and gained 0.5 percent in Guangzhou. Prices advanced in 57 of the 70 cities the government tracks, versus 62 in January.

 

Visually:

 

 

So all of the above would suggest the FT’s account of an imminent, if quiet, bailout of ZX is true. Turns out isn’t, and in fact the PBOC was so pissed it took to its Weibo microblog site to explain what really happened. As Bloomberg summarized, the Chinese central bank says it didn’t participate in an “emergency meeting held Tuesday” to discuss Zhejiang Xingrun Real Estate as reported by some unidentified media  according to a statement posted on PBOC’s official microblog account. PBOC is not involved in dealing with risks from the developer, according to the statement.

 

For the purists, here is the official statement via Weibo:

 

[Condemned individual foreign media untrue] March 18, individual foreign media reports, “China’s central bank to discuss emergency aid small real estate company,” inconsistent with the facts: First, the People’s Bank did not participate in the text referred to “convene an emergency meeting on Tuesday.” . Second, the People’s Bank of Zhejiang Xingrun not involved in the disposition of property-related risks. False reports to the media release behavior in unverified cases, the People’s Bank strongly condemned.

 

Well, it was google-translated, but the gist is clear.

 

So which is it: will China really let ZX fail and allow the second bond default in under a month to further slam the secondary bond (and much less relevant equity) market, while grinding the all important primary issuance market to a halt at precisely the time when credit creation in China is absolutely critical, or will the PBOC have been exposed as a liar once again.

 

Since the PBOC is merely a central bank, and thus lying is its bread and butter, our money is on the former, but one can only hope that in a world in which the Bernanke global put is now ubiquitous and perpetual, and the only investment calculus depends on the return/return analysis, that it will be “communist” China that finally allows risk back into the global investment equation.

 

And finally, putting it all into perspective, is our favorite chart showing bank asset creation in China and the US over the past five years. It needs no commentary.

 

 

The Second Chinese Corporate Default: Real Estate Developer With CNY3.5 Billion In Debt Collapses | Zero Hedge

The Second Chinese Corporate Default: Real Estate Developer With CNY3.5 Billion In Debt Collapses | Zero Hedge.

A few days ago, copper prices and the Chinese stock market were roiled by speculation that another – the second in a row – Chinese bond default may be imminent, in the shape of Baoding Tianwei Baobian Electric (TBE) a maker of electrical equipment and solar panels, whose bonds and stock were suspended from trading a week ago after reporting massive losses. A few days later,TBE “promised” not to default when its next interest payment is due in July (although how the insolvent company can see that far into the future is just a little confusing). And yet the market shrugged and contrary to its recent idiotic euphoria to surge on even the tiniest of non-horrible news, barely saw a rise. Today we may know the reason: overnight Bloomberg reports that second Chinese corporate bond default may be imminent after the collapse and arrest of the largest shareholder of closely held Chinese real estate developer Zhejiang Xingrun Real Estate Co, which just happens to be saddled with 3.5 billion yuan ($566.6 million) of debt.

Debt which absent a bailout, which at this point is very improbable, will not be repaid.

From Bloomberg:

Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank Corp. (939) holding more than 1 billion yuan of its debt, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. The company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said.

What is curious about this particular potential default is that it touches not only on the massive leverage in the Chinese system, but on the one real bubble in China (since nobody there seems to care about the Shanghai Composite): housing.

The collapse of the company, in the eastern town of Fenghua, adds to concern of strains in China’s real estate sector. The property market in smaller Chinese cities faces “true risks of a sharp correction” due to oversupply and investors may have underestimated the risk, Nomura Holdings Inc. economists said in a March 14 report.

Two calls to the chairman’s office and financial department at Zhejiang Xingrun weren’t answered today. A woman who answered the phone at the Fenghua government’s news office who declined to give her name confirmed the company cannot pay its debt. A Beijing-based press officer at CCB said the bank asked for more information from its local branch about the report and hasn’t heard back.

So going back to the collapse, Bloomberg adds that the failure of the company was reported earlier today by the Chinese-language National Business Daily, which cited an unidentified government official for the news. The report blamed the failure on mismanagement and high costs of private lending, according to the newspaper.

“We think the default of the developer will alert the banks on escalating risk from developers amid the liquidity tightening,” said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research. “We maintain our view that banks may revisit loan policy on property and may take stricter stance on property development loans, particularly for small developers.”

It is also about to get worse: “Property shares slid to a 16-month low in February after Industrial Bank Co. suspended mezzanine financing for developers, adding to concerns that smaller developers may default on their borrowings amid the government’s property curbs and an economic slowdown.”

And just like that, quite suddenly, the tide is flowing out and all those swimming naked will be revealed. What happens next? Precisely what we said would happen a week ago, when we explained the imminent plight of Chinese corporate where things such as this are about to be revealed…

CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

… as having taken place at a truly massive scale.

The Second Chinese Corporate Default: Real Estate Developer With CNY3.5 Billion In Debt Collapses | Zero Hedge

The Second Chinese Corporate Default: Real Estate Developer With CNY3.5 Billion In Debt Collapses | Zero Hedge.

A few days ago, copper prices and the Chinese stock market were roiled by speculation that another – the second in a row – Chinese bond default may be imminent, in the shape of Baoding Tianwei Baobian Electric (TBE) a maker of electrical equipment and solar panels, whose bonds and stock were suspended from trading a week ago after reporting massive losses. A few days later,TBE “promised” not to default when its next interest payment is due in July (although how the insolvent company can see that far into the future is just a little confusing). And yet the market shrugged and contrary to its recent idiotic euphoria to surge on even the tiniest of non-horrible news, barely saw a rise. Today we may know the reason: overnight Bloomberg reports that second Chinese corporate bond default may be imminent after the collapse and arrest of the largest shareholder of closely held Chinese real estate developer Zhejiang Xingrun Real Estate Co, which just happens to be saddled with 3.5 billion yuan ($566.6 million) of debt.

Debt which absent a bailout, which at this point is very improbable, will not be repaid.

From Bloomberg:

Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank Corp. (939) holding more than 1 billion yuan of its debt, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. The company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said.

What is curious about this particular potential default is that it touches not only on the massive leverage in the Chinese system, but on the one real bubble in China (since nobody there seems to care about the Shanghai Composite): housing.

The collapse of the company, in the eastern town of Fenghua, adds to concern of strains in China’s real estate sector. The property market in smaller Chinese cities faces “true risks of a sharp correction” due to oversupply and investors may have underestimated the risk, Nomura Holdings Inc. economists said in a March 14 report.

Two calls to the chairman’s office and financial department at Zhejiang Xingrun weren’t answered today. A woman who answered the phone at the Fenghua government’s news office who declined to give her name confirmed the company cannot pay its debt. A Beijing-based press officer at CCB said the bank asked for more information from its local branch about the report and hasn’t heard back.

So going back to the collapse, Bloomberg adds that the failure of the company was reported earlier today by the Chinese-language National Business Daily, which cited an unidentified government official for the news. The report blamed the failure on mismanagement and high costs of private lending, according to the newspaper.

“We think the default of the developer will alert the banks on escalating risk from developers amid the liquidity tightening,” said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research. “We maintain our view that banks may revisit loan policy on property and may take stricter stance on property development loans, particularly for small developers.”

It is also about to get worse: “Property shares slid to a 16-month low in February after Industrial Bank Co. suspended mezzanine financing for developers, adding to concerns that smaller developers may default on their borrowings amid the government’s property curbs and an economic slowdown.”

And just like that, quite suddenly, the tide is flowing out and all those swimming naked will be revealed. What happens next? Precisely what we said would happen a week ago, when we explained the imminent plight of Chinese corporate where things such as this are about to be revealed…

CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

… as having taken place at a truly massive scale.

"Magic" Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China | Zero Hedge

“Magic” Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China | Zero Hedge.

While the world is terrified about what China – where corporate bond defaults are now permitted – may be about to unleash on the world, most are all too happy to remain in a state of delightful ignorance. We decided to take a peek behind the scenes.

Recall that as we have repeatedly shown in the calendar of coming Chinese bond default, on March 31, a borrower named “Magic” (no comment) is set to default on a CNY196 million Trust.

The default may or may not happen, as there is always a high likelihood it will simply be bailed out as has happened frequently in the past, but regardless of the final outcome, here is what isreally going on behind the scenes. From Bank of America:

31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust

Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

Potential outcome: The developer and the trust company may share the repayment.

Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrestA local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.

Please re-read that first part again:

CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

So, “Magic” not only sold the collateral… but also mortgaged it to a few other lenders: lenders who count its as a perfectly performing asset when in reality they have zero claims to it. Did they steal that straight from the MF Global instruction manual?

Now add this:

“The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.”

… and multiply by a few thousand for all the other shadow (and not so shadow) players who have engaged in precisely this kind of gross abuse of underlying collateral, which also happens to be the main reason why China can magically create trillions in debt out of thin air with zero collateral constraints, each and every year, no questions asked.

Well, the time to ask a question or two has finally arrived.

“Magic” Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China | Zero Hedge

“Magic” Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China | Zero Hedge.

While the world is terrified about what China – where corporate bond defaults are now permitted – may be about to unleash on the world, most are all too happy to remain in a state of delightful ignorance. We decided to take a peek behind the scenes.

Recall that as we have repeatedly shown in the calendar of coming Chinese bond default, on March 31, a borrower named “Magic” (no comment) is set to default on a CNY196 million Trust.

The default may or may not happen, as there is always a high likelihood it will simply be bailed out as has happened frequently in the past, but regardless of the final outcome, here is what isreally going on behind the scenes. From Bank of America:

31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust

Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

Potential outcome: The developer and the trust company may share the repayment.

Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrestA local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.

Please re-read that first part again:

CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

So, “Magic” not only sold the collateral… but also mortgaged it to a few other lenders: lenders who count its as a perfectly performing asset when in reality they have zero claims to it. Did they steal that straight from the MF Global instruction manual?

Now add this:

“The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.”

… and multiply by a few thousand for all the other shadow (and not so shadow) players who have engaged in precisely this kind of gross abuse of underlying collateral, which also happens to be the main reason why China can magically create trillions in debt out of thin air with zero collateral constraints, each and every year, no questions asked.

Well, the time to ask a question or two has finally arrived.

China On The Verge Of First Corporate Bond Default Once More | Zero Hedge

China On The Verge Of First Corporate Bond Default Once More | Zero Hedge.

While everyone was focusing on the threat of tumbling debt dominoes in China’s shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers – the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate – as well as shadow banking – bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.

FT reports:

The company has until March 7th to repay the interest, charged at an annual 8.98 per cent, the company said in a statement. “Due to various uncontrollable factors, until now the company has only raised Rmb 4m to pay the interest,” it said in the statement.

Trading in the Chaori bond, given a CCC junk rating, was suspended last July because the company suffered two consecutive years of losses. The company had a further RMB1.37bn loss in 2013, according to the results it posted on the exchange.

Just pointing out the obvious here, but how bad must things be for the company to be on the verge of default not due to principal repayment but because two years after issuing a bond, it only has 4% in cash on hand for the intended coupon payment?

Furthermore, as noted previously, China has so far been able to kick the can on its defaults for nearly three decades. Which is why suddenly everyone is focusing on this tiny company: Chaori Solar’s default – if it transpires – would mark the first time a company has defaulted on publicly traded debt in China since the central bank began regulating the market in the late 1990s. Bloomberg adds, citing Liu Dongliang, Shenzhen-based senior analyst at China Merchants Bank, that such a default would be the “first of a string of further defaults in China.”  FT continues:

Though the bond is relatively small, a default could deliver a sharp shock to risk management strategies in China vast corporate debt market, estimated by Standard&Poor’s to be $12tn in size at the end of 2013.

Any default could also slow down new issuance. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 per cent, from Rmb1.82tn to Rmb4.74tn, between December 2008 and September 2013.

In January, a Chinese fund company avoided a high-profile default, reaching a last-minute agreement to repay investors in a soured $500m high-yield investment trust, in a case that had sent tremors through global markets.

Then again, those who follow China’s bond market will know that Chaori’s failure to pay interest would not really be the true first Chinese corporate default: recall as we reported almost exactly a year ago:

For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th – and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings – owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits – and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms.

So yes: a prior default, and one by a solar company no less. However, going back down memory lane again, ultimately Suntech had the same fate as all other insolvent corporations in China do – it got a post-facto bailout:

Struggling Chinese solar panel maker Suntech Power Holdings Co Ltd is set for a $150 million local government bailout, a step towards tackling its $2.3 billion debt pile that is at odds with Beijing’s effort to wean the sector off state support. The lifeline comes from the municipal government of Wuxi, an eastern city where Suntech’s Chinese subsidiary is headquartered, and follows Shunfeng Photovoltaic International Ltd’s signing of a preliminary deal to buy its bankrupt Chinese unit.

Curious why China’s local government continues to balloon at an exponential pace, and has doubled in roughly two years to roughly CNY20 trillion (that’s the real number – the official, made up one is CNY17.9 trillion or $3 trillion)? Because just like the Fed and ECB are the ultimate toxic bad banks in the US and Eurozone, respectively, in China all the bad debt ultimately disappears under the comfortable carpet of the broad “local government debt” umbrella. However, things like these must never be discussed in polite public conversation. Which is why despite what Guan Qingyou, an economist with Minsheng Securities said in his Weibo account that the “first default might not be a bad thing even that means more defaults might happen, because it is ultimately good for the market reform”, the reality is that once the dam breaks, it may well be game over for a country that only knows one thing – how to kick the can ever further.

There are additional considerations: As the FT also notes, “given the squeeze on credit supply already seen in January this year, corporate debt defaults could further slow momentum in China’s fixed asset investments.” In other words, the just announced 7.5% GDP target revealed ahead of the National People’s Congress will be impossible to achieve, should China be unable to fund the Capex to build its burgeoning ghost cities, should rates spike.

Which is why this too default will ultimately be made to disappear.

And the next one, and the one after that, because “now” is never the right time to make the right, but difficult decision.

But how much longer can China avoid reality? Not much if one consider this just crossed headline on Bloomberg:

  • CHINA TO SHUT 50,000 COAL FURNACES THIS YEAR, LI SAYS

Recall coal is the industry that China’s near-bankrupt Trusts have most of their exposure to.

And then there are our four favorite charts confirming the dire situation in China’s credit market:

 

 

 

 

 

For those who need a refresh course on why the Chinese situation is rapidly going from bad to worse, read these several most recent comprehensive articles on the topic:

Bank of America warns further that a more confident government means the start of defaults

With amazing speed in consolidating power in 2013, a more confident President Xi Jinping and team are expected to push for a wide range of reforms. 2014 will be the year for China seriously cleans up mounting local government and corporate debts which have been rapidly accumulated since late 2008. We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market
 

China On The Verge Of First Corporate Bond Default Once More | Zero Hedge

China On The Verge Of First Corporate Bond Default Once More | Zero Hedge.

While everyone was focusing on the threat of tumbling debt dominoes in China’s shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers – the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate – as well as shadow banking – bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.

FT reports:

The company has until March 7th to repay the interest, charged at an annual 8.98 per cent, the company said in a statement. “Due to various uncontrollable factors, until now the company has only raised Rmb 4m to pay the interest,” it said in the statement.

Trading in the Chaori bond, given a CCC junk rating, was suspended last July because the company suffered two consecutive years of losses. The company had a further RMB1.37bn loss in 2013, according to the results it posted on the exchange.

Just pointing out the obvious here, but how bad must things be for the company to be on the verge of default not due to principal repayment but because two years after issuing a bond, it only has 4% in cash on hand for the intended coupon payment?

Furthermore, as noted previously, China has so far been able to kick the can on its defaults for nearly three decades. Which is why suddenly everyone is focusing on this tiny company: Chaori Solar’s default – if it transpires – would mark the first time a company has defaulted on publicly traded debt in China since the central bank began regulating the market in the late 1990s. Bloomberg adds, citing Liu Dongliang, Shenzhen-based senior analyst at China Merchants Bank, that such a default would be the “first of a string of further defaults in China.”  FT continues:

Though the bond is relatively small, a default could deliver a sharp shock to risk management strategies in China vast corporate debt market, estimated by Standard&Poor’s to be $12tn in size at the end of 2013.

Any default could also slow down new issuance. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 per cent, from Rmb1.82tn to Rmb4.74tn, between December 2008 and September 2013.

In January, a Chinese fund company avoided a high-profile default, reaching a last-minute agreement to repay investors in a soured $500m high-yield investment trust, in a case that had sent tremors through global markets.

Then again, those who follow China’s bond market will know that Chaori’s failure to pay interest would not really be the true first Chinese corporate default: recall as we reported almost exactly a year ago:

For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th – and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings – owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits – and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms.

So yes: a prior default, and one by a solar company no less. However, going back down memory lane again, ultimately Suntech had the same fate as all other insolvent corporations in China do – it got a post-facto bailout:

Struggling Chinese solar panel maker Suntech Power Holdings Co Ltd is set for a $150 million local government bailout, a step towards tackling its $2.3 billion debt pile that is at odds with Beijing’s effort to wean the sector off state support. The lifeline comes from the municipal government of Wuxi, an eastern city where Suntech’s Chinese subsidiary is headquartered, and follows Shunfeng Photovoltaic International Ltd’s signing of a preliminary deal to buy its bankrupt Chinese unit.

Curious why China’s local government continues to balloon at an exponential pace, and has doubled in roughly two years to roughly CNY20 trillion (that’s the real number – the official, made up one is CNY17.9 trillion or $3 trillion)? Because just like the Fed and ECB are the ultimate toxic bad banks in the US and Eurozone, respectively, in China all the bad debt ultimately disappears under the comfortable carpet of the broad “local government debt” umbrella. However, things like these must never be discussed in polite public conversation. Which is why despite what Guan Qingyou, an economist with Minsheng Securities said in his Weibo account that the “first default might not be a bad thing even that means more defaults might happen, because it is ultimately good for the market reform”, the reality is that once the dam breaks, it may well be game over for a country that only knows one thing – how to kick the can ever further.

There are additional considerations: As the FT also notes, “given the squeeze on credit supply already seen in January this year, corporate debt defaults could further slow momentum in China’s fixed asset investments.” In other words, the just announced 7.5% GDP target revealed ahead of the National People’s Congress will be impossible to achieve, should China be unable to fund the Capex to build its burgeoning ghost cities, should rates spike.

Which is why this too default will ultimately be made to disappear.

And the next one, and the one after that, because “now” is never the right time to make the right, but difficult decision.

But how much longer can China avoid reality? Not much if one consider this just crossed headline on Bloomberg:

  • CHINA TO SHUT 50,000 COAL FURNACES THIS YEAR, LI SAYS

Recall coal is the industry that China’s near-bankrupt Trusts have most of their exposure to.

And then there are our four favorite charts confirming the dire situation in China’s credit market:

 

 

 

 

 

For those who need a refresh course on why the Chinese situation is rapidly going from bad to worse, read these several most recent comprehensive articles on the topic:

Bank of America warns further that a more confident government means the start of defaults

With amazing speed in consolidating power in 2013, a more confident President Xi Jinping and team are expected to push for a wide range of reforms. 2014 will be the year for China seriously cleans up mounting local government and corporate debts which have been rapidly accumulated since late 2008. We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market
 
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