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Forget Russia Dumping U.S. Treasuries … Here’s the REAL Economic Threat Washington’s Blog
Forget Russia Dumping U.S. Treasuries … Here’s the REAL Economic Threat Washington’s Blog.
Russia Could Crush the Petrodollar
Russia threatened to dump its U.S. treasuries if America imposed sanctions regarding Russia’s action in the Crimea.
Zero Hedge argues that Russia has already done so.
But veteran investor Jim Sinclair argues that Russia has a much scarier financial attack which Russia can use against the U.S.
Specifically, Sinclair says that if Russia accepts payment for oil and gas in any currency other than the dollar – whether it’s gold, the Euro, the Ruble, the Rupee, or anything else – then the U.S. petrodollar system will collapse:
Indeed, one of the main pillars for U.S. power is the petrodollar, and the U.S. is desperate for the dollar to maintain reserve status. Some wise commentators have argued that recent U.S. wars have really been about keeping the rest of the world on the petrodollar standard.
The theory is that – after Nixon took the U.S. off the gold standard, which had made the dollar the world’s reserve currency – America salvaged that role by adopting the petrodollar. Specifically, the U.S. and Saudi Arabia agreed that all oil and gas would be priced in dollars, so the rest of the world had to use dollars for most transactions.
But Reuters notes that Russia may be mere months away from signing a bilateral trade deal with China, where China would buy huge quantities of Russian oil and gas.
Zero Hedge argues:
Add bilateral trade denominated in either Rubles or Renminbi (or gold), add Iran, Iraq, India, and soon the Saudis (China’s largest foreign source of crude, whose crown prince also happened to meet president Xi Jinping last week to expand trade further) and wave goodbye to the petrodollar.
As we noted last year:
The average life expectancy for a fiat currency is less than 40 years.
But what about “reserve currencies”, like the U.S. dollar?
JP Morgan noted last year that “reserve currencies” have a limited shelf-life:
As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns. It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.
Remember, China is entering into more and more major deals with other countries to settle trades in Yuans, instead of dollars. This includes the European Union (the world’s largest economy) [and also Russia].
And China is quietly becoming a gold superpower…
Given that China has surpassed the U.S. as the world’s largest importer of oil, Saudi Arabia is moving away from the U.S. … and towards China. (Some even argue that the world will switch from the petrodollar to the petroYUAN. We’re not convinced that will happen.)
In any event, a switch to pricing petroleum in anything other than dollars exclusively – whether a single alternative currency, gold, or even a mix of currencies or commodities – would spell the end of the dollar as the world’s reserve currency.
For that reason, Sinclair – no fan of either Russia or Putin – urges American leaders to back away from an economic confrontation with Russia, arguing that the U.S. would be the loser.
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Forget Russia Dumping U.S. Treasuries … Here's the REAL Economic Threat Washington's Blog
Forget Russia Dumping U.S. Treasuries … Here’s the REAL Economic Threat Washington’s Blog.
Russia Could Crush the Petrodollar
Russia threatened to dump its U.S. treasuries if America imposed sanctions regarding Russia’s action in the Crimea.
Zero Hedge argues that Russia has already done so.
But veteran investor Jim Sinclair argues that Russia has a much scarier financial attack which Russia can use against the U.S.
Specifically, Sinclair says that if Russia accepts payment for oil and gas in any currency other than the dollar – whether it’s gold, the Euro, the Ruble, the Rupee, or anything else – then the U.S. petrodollar system will collapse:
Indeed, one of the main pillars for U.S. power is the petrodollar, and the U.S. is desperate for the dollar to maintain reserve status. Some wise commentators have argued that recent U.S. wars have really been about keeping the rest of the world on the petrodollar standard.
The theory is that – after Nixon took the U.S. off the gold standard, which had made the dollar the world’s reserve currency – America salvaged that role by adopting the petrodollar. Specifically, the U.S. and Saudi Arabia agreed that all oil and gas would be priced in dollars, so the rest of the world had to use dollars for most transactions.
But Reuters notes that Russia may be mere months away from signing a bilateral trade deal with China, where China would buy huge quantities of Russian oil and gas.
Zero Hedge argues:
Add bilateral trade denominated in either Rubles or Renminbi (or gold), add Iran, Iraq, India, and soon the Saudis (China’s largest foreign source of crude, whose crown prince also happened to meet president Xi Jinping last week to expand trade further) and wave goodbye to the petrodollar.
As we noted last year:
The average life expectancy for a fiat currency is less than 40 years.
But what about “reserve currencies”, like the U.S. dollar?
JP Morgan noted last year that “reserve currencies” have a limited shelf-life:
As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns. It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.
Remember, China is entering into more and more major deals with other countries to settle trades in Yuans, instead of dollars. This includes the European Union (the world’s largest economy) [and also Russia].
And China is quietly becoming a gold superpower…
Given that China has surpassed the U.S. as the world’s largest importer of oil, Saudi Arabia is moving away from the U.S. … and towards China. (Some even argue that the world will switch from the petrodollar to the petroYUAN. We’re not convinced that will happen.)
In any event, a switch to pricing petroleum in anything other than dollars exclusively – whether a single alternative currency, gold, or even a mix of currencies or commodities – would spell the end of the dollar as the world’s reserve currency.
For that reason, Sinclair – no fan of either Russia or Putin – urges American leaders to back away from an economic confrontation with Russia, arguing that the U.S. would be the loser.
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Take These Steps Today To Survive An International Crisis
Take These Steps Today To Survive An International Crisis.
With the Crimea referendum passed and Russia ready to annex the region, the United States and the European Union have threatened sanctions. The full extent of these sanctions is not yet known, and announcements are pending for the end of March. If these measures are concrete, they will of course be followed inevitably by economic warfare, including a reduction of natural gas exports to the EU and the eventually full dump of the U.S. dollar by Russia and China. As I have discussed in recent articles, the result of these actions will be disastrous.
For those of us in the liberty movement, it is now impossible to ignore the potential threat to our economy. No longer can people claim that “perhaps” there will be a crisis someday, that perhaps “five or 10 years” down the road we will have to face the music. No, the threat is here now, and it is very real.
The loss of the dollar’s world reserve status will destroy the only thread holding up its value, namely, investor faith. There are only two possible outcomes from that point onward:
A) The U.S. will be forced to default because no nation will purchase our Treasury bonds and support our debt spending, causing the dollar’s value to implode.
B) The Fed will choose to restart and expand quantitative easing measures, confiscate pension funds, raid bank accounts or issue new taxes in order to keep the system afloat; this will also end in the eventual collapse of dollar value and hyperinflation.
The consequences will lead to an explosion in prices — first in commodities and necessities like petroleum, imported raw materials, food, electricity, etc. and then in all other goods and services. Austerity measures will be instituted by Federal and State governments. Cuts to social welfare programs, including food stamps, are probable. Civil infrastructure will suffer. The cost effectiveness of maintaining public utilities could become unrealistic. Anyone relying on such services may find themselves cut off for days, weeks or indefinitely. Public suffering will invariably rise, along with public crime.
If events like Hurricane Katrina in New Orleans are any indication, the Federal government’s response will be inadequate, to say the least. The Federal Emergency Management Agency clearly cannot be relied upon to provide food, shelter, medical care or protection for communities. In fact, in the aftermath of Hurricane Katrina, the Feds did far more harm than good, corralling people into camps where death was rampant and disarming outlying neighborhoods so that they could not defend themselves. Tens of millions of dollars in donated and Federally purchased necessities were never delivered to aid survivors. Trucks were turned away, and help from civilian sources was denied.
The point is, if you find yourself in the midst of a national or international catastrophe, you should assume that you will be on your own with whatever preparations you made beforehand. To assume otherwise would be foolish, given our government’s track record.
There are some people who will argue that during an international crisis, such as an economic war or a world war, there is no purpose to preparedness. They will argue that there is nothing an individual or family can do to weather the storm or fight back, because the scale of the threat would be “too great.” There is no place for such defeatism in the life of the liberty-minded. The scale of the threat is irrelevant, and only cowards give up a fight before it even begins. Survival and freedom require an unwavering conviction. Nihilists will fulfill their own prophecies, suffering a fate exactly as they imagine for the rest of us; living in fear, slavery, and obscurity.
That said, it is also important to acknowledge the truth that the majority of Americans today are utterly unready for a minor localized disaster, let alone a national or global crisis. This problem, though, could be easily remedied with a few simple beginning steps. I find that most people are not averse to the idea of preparedness, but many have trouble taking the first steps in the right direction. For longtime preparedness champions, the information listed here might seem like old-hat. However, I challenge each liberty movement member to approach at least one friend or family member who could benefit from the steps below. Prepping appears daunting to the uninitiated; show them how simple it can actually be.
Below is a list of goals that every liberty movement member and American can easily achieve starting today and continuing over the course of the next month. If enough citizens were to take the initiative to do these things, all threats — no matter how imposing — could be overcome.
Buy Three Months Of Food Stock
Food supply is the greatest Achilles’ heel of the American populace. Most homes store less than one week’s worth of food items at any given time. The average person needs between 2,000 and 3,000 calories per day to maintain sufficient energy for survival. It takes around four to six weeks for a person to die of starvation and malnutrition. In a collapse scenario, most deaths will likely occur within the first few months, either by weakness and illness, or by looting and violence. The idea is to at least get through this first catastrophic phase without becoming a villain, or falling victim to one. One person removed from starvation is one possible threat removed from the equation.
Three months of supply is not ideal by any means, but it will buy you precious time. Start with 2,000 calories per day per person. Bulk foods can be purchased cheaply (for now) and can at the very least provide sustenance during emergencies. A 20-pound bag of rice, for instance, can be had for less than $15 and provides about 30,000 calories, or 2,000 calories per day for 15 days for one person. Supplement with beans, canned vegetables and meats, honey for sugar, or freeze-dried goods, and you will be living more comfortably than 90 percent of the population.
Food stockpiling is one of the easiest and most vital measures a person could take. Yet, sadly, it is one of the last preparations on people’s minds.
Buy A Water Filter
Do not count on city water to remain functional. Even during a drawn-out economic downturn rather than an immediate crisis, there is a good chance that some utilities will be sporadic and unreliable. This means you will have to focus on rainwater collection, as well as water from unclean sources. Boiling the water will kill any bacteria, but it will not kill the taste of sediments and other materials floating around. A high-grade survival filter is the best way to get clean water that tastes good.
The average person needs about a gallon of water per day to remain healthy and hydrated. I highly recommend the Sawyer Mini Water Filter, which is a compact washable filter that can cleanse up to 100,000 gallons of water. It uses no moving parts, making it harder to break; and it costs only $20.
Buy A Small Solar Kit
Try going a week or two without electricity, and you may find how dismal life can truly be. The very absence of light at night reduces one’s productivity time drastically, and using fuel for lanterns is not practical in the long term. Solar power is truly the way to go for a grid-collapse scenario.
I’ve heard much whining about the cost of solar power, but small systems that will serve most electrical needs can be set up for less than $1,000. Two 100-watt panels, a power inverter, charge controller and four to six 12-volt deep-cycle batteries are enough to deal with most electrical needs in a survival situation; and all these items can be contained in a portable foot locker for minimal cost. New solar panels are much more effective in low-light conditions and winter weather as well, making solar a must-have prep item.
Store A Fuel Source
Twenty gallons of gasoline treated with fuel saver is not expensive to purchase today, but in the midst of hyperinflation, it may be impossible to obtain tomorrow. Kerosene is useful for heating and cooking. Propane can be stored for decades and runs numerous appliances. If you live in a forested area, dried wood can be had for free, and can keep you warm throughout the winter months (keep in mind the your local danger factor when using fire). It is vital to have a means to stay warm and fed during the most difficult seasonal changes, especially during a grid down scenario.
Find Alternative Shelter
There are no guarantees during a full-spectrum disaster. Having all your eggs in one basket is not only stupid, but unnecessary. Always have a plan B. That means scouting an alternative location for you and your family in the event that your current shelter comes under threat. This location should be far enough away from large population centers but still within a practical range for you to reach them. It should also have a nearby water source, and be defensible. Establishing supply caches near this site is imperative. Do not assume that you will be able to take all of your survival supplies with you from your home. Expect that surprises of a frighteningvariety will arise.
Buy One Semi-Automatic Rifle
At this point I really don’t care what model of rifle people purchase, as long as they have one, preferably in high capacity and semi-automatic. AR-15, AK-47, Saiga, SKS, M1A: just get one! Every American should be armed with a military-grade rifle. If you are not, you are not only negligent in your duty as a free citizen, but you are also at a distinct disadvantage against the kind of opponents you are likely to face in a collapse situation.
Buy 1,000 Rounds Of Ammunition
Again, this is by no means an ideal stockpile, but it is enough to get you through a couple rough patches if you train furiously. Cheap AK-47 ammo can be had for $5 for a box of 20 rounds. Get what you can while you can, because the prices are only going to skyrocket in the near term.
Approach One Friend Or Neighbor
Community is what will make the difference between life and death during a SHTF collapse. I challenge everyone in the liberty movement to find at least ONE other person to work with in the event of disaster. Lone-wolf operations may be strategically practical for short periods of time; but everyone needs rest, and everyone needs someone else to watch his back. Do not fall into the delusion that you will be able to handle everything on your own.
Learn One Barter Skill
Learn how to fix one vital thing or provide one vital service. Try emergency medical training, gunsmithing or metal working, as long as it is an ability that people will value. You have to be able to produce something that people want in order to sustain yourself beyond the point at which your survival stockpile runs out. Be sure that you are seen as indispensable to those around you.
Grow A Garden
Spring is upon us, and now is the perfect opportunity to grow your own food supply. If you have even a small yard, use that space to grow produce. Focus on high-protein and high-vitamin foods. Buy a dehydrator or canning supplies and save everything. Use heirloom seeds so that you can collect new seed from each crop to replant in the future. If every American had a garden in his backyard, I wouldn’t be half as worried about our survival as I am today.
Prepare Your Mind For Calamity
The most valuable resource you will ever have is your own mind. The information held within it and the speed at which you adapt will determine your survival, whether you have massive preparations or minimal preparations. Most people are not trained psychologically to handle severe stress, and this is why they die. Panic equals extinction. Calm readiness equals greater success.
The state of our financial system is one of perpetual tension. The structure is so weak that any catalyst or trigger event could send it tumbling into the abyss. Make no mistake; time is running out. We may witness a terrifying breakdown tomorrow, in a year, or if we are lucky, a little longer. The path, though, has been set and there is no turning back. All of the items above can be undertaken with minimal cash flow. If you receive a regular paycheck, you can establish a survival supply for yourself and your family. There are no excuses.
Take the steps above seriously. Set your goals for the next four weeks and see how many of them you can accomplish. Do what you can today, or curse yourself tomorrow. What’s it going to be?
You can contact Brandon Smith at: brandon@alt-market.com
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The dominoes begin to fall in China
The dominoes begin to fall in China.
March 18, 2014
Bali, Indonesia
[Editor’s Note: Tim Staermose, Sovereign Man’s Chief Investment Strategist, is filling in for Simon today.]
Forget tapering. Forget Ukraine. The largest single risk to the world economy and financial markets right now is China.
What’s going on in China reminds me a lot of what I witnessed firsthand when I lived in South Korea in the 1990s, before that economy’s crash in 1998.
Just as China now, South Korea was an immature, state-controlled financial system funneling cheap money to well-connected and politically favored large enterprises.
Fuelled by a steady diet of cheap money, these companies kept adding capacity with no regard to profitability or return on capital. They simply focused on producing more stuff and expanding their size. They employed more people, and everyone was happy.
But, all the while, they were borrowing more and more money, until eventually they collapsed under the debt load when liquidity dried up.
Before Korea, the exact same thing happened in Japan, and a giant, unsustainable debt binge brought the “miracle economy” to its knees.
But the Korean and Japanese debt bubbles are nothing compared to what we see in China today.
Consider this: in the last five years, the Chinese created $16 TRILLION in credit that is now circulating in the economy… financing ghost cities and useless infrastructure projects.
Floor space per capita in China is now 30 square meters (about 320 sq. ft.) per person. Japan was at that level in 1988. And the economy burst the following year.
More astounding, this $16 trillion in credit is DOUBLE the $8 trillion in credit that China created in the previous 5,000+ years of its existence.
The Chinese government recognizes it has a problem. It realizes it can no longer keep the dam from breaking. And in the past week, it bit the bullet.
In the last two weeks, Chaori Solar and Haixin Steel were allowed to default, i.e. they weren’t bailed out.
This is the first time in China’s modern history they’ve had a default, let alone two. They can no longer keep the game up, and the dominoes are beginning to topple.
I cannot stress this enough. What we’re witnessing is a major paradigm shift.
Of course, the Chinese government claims they can control the impact of these “relatively minor” corporate defaults.
But as we saw during the sub-prime crisis in the Unites States, the complex web of inter-linkages in the financial system means they are playing with fire.
I expect many more defaults in China in the coming weeks and months. I expect some important Chinese financial institutions to get into trouble.
And I expect the Chinese government will completely lose control over the situation.
My recommendations are 2-fold:
1. If you have any exposure to Chinese stocks, or the Chinese Yuan, I strongly suggest you reconsider.
2. If you have investments in iron ore or copper producers, get out.
But it’s not all doom and gloom. It’s going to take time for China to suffer through this crisis. But, if the Chinese government lets the dominoes fall where they may, the country will be better off in the long term.
The lessons from markets such as South Korea and Indonesia, in aftermath of the 1997-1999 Asian economic crisis, are clear.
If China frees up and liberalizes its financial markets in the face of a crisis, writes off bad loans, and closes down insolvent banks, it will emerge in a much stronger position once the crisis blows over.
And there will be lots of money to be made buying good-quality Chinese shares during the crisis. But, for now, it’s time to brace for the downturn.
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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.
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.
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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.
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.
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Sol Sanders: The [Chinese] emperor has no clothes | Zero Hedge
Sol Sanders: The [Chinese] emperor has no clothes | Zero Hedge.
My old friend Sol Sanders has written an important comment on the coming collapse of the Chinese Ponzi scheme. For years now, I have been warning people that the Chinese Communist Party is not above manufacturing economic and financial statistics. During my trip to France last week for an event sponsored by the Global Interdependence Center and the Banque de France, I appalled a group of economists by suggesting that there are no banks in China. Statistics on growth, debt and investment are all a fiction used to manipulate opinion, inside and outside of China.
We all remember the famous quote by Mao Zedong: “Political power grows out of the barrel of a gun.” But how many of us have actually read the book? Here is the full quote famed on 6 November 1938, during Mao’s concluding speech while addressing the “Problems on War and Strategy” on the party’s sixth Central Committee’s sixth Plenary session:
Every Communist must grasp the truth, “Political power grows out of the barrel of a gun.” Our principle is that the Party commands the gun, and the gun must never be allowed to command the Party. Yet, having guns, we can create Party organizations, as witness the powerful Party organizations which the Eighth Route Army has created in northern China. We can also create cadres, create schools, create culture, create mass movements. Everything in Yenan has been created by having guns. All things grow out of the barrel of a gun. According to the Marxist theory of the state, the army is the chief component of state power. Whoever wants to seize and retain state power must have a strong army. Some people ridicule us as advocates of the “omnipotence of war”. Yes, we are advocates of the omnipotence of revolutionary war; that is good, not bad, it is Marxist. The guns of the Russian Communist Party created socialism. We shall create a democratic republic. Experience in the class struggle in the era of imperialism teaches us that it is only by the power of the gun that the working class and the labouring masses can defeat the armed bourgeoisie and landlords; in this sense we may say that only with guns can the whole world be transformed. We are advocates of the abolition of war, we do not want war; but war can only be abolished through war, and in order to get rid of the gun it is necessary to take up the gun.
Enjoy
Chris
The [Chinese] emperor has no clothes
By Sol Sanders
http://yeoldecrabb.com/2014/03/17/the-chinese-emperor-has-no-clothes/
The shudder that relatively minor bad news from China sent through world markets last week was a warning that the halcyon days of Beijing’s economy are over. Indeed, reluctantly because of self-interest and wishful thinking, a universal consensus finally is emerging that the Chinese economy is in deep trouble, a crisis that could perhaps overturn the regime itself.
The cardinal indicator is that the Chinese economy is slowing down. How much, how fast, which sectors, is all open to speculation given the notorious unreliability of Beijing statistics. But certainly we long ago dipped below that 8% minimal annual gross national product growth rate which once was accepted inside and outside the Middle Kingdom as the requirement for political stability.
In a sense, it was inevitable: perhaps the world has no history of a regional economy as large as China’s growing at its phenomenally high rate over the past two decades. But, then, too, it has been obvious to all but the most optimistic that huge aberrations were being built into a wanting modernization process that would eventually haunt the leadership. That’s where we are now.
There is unusual agreement, again, among Chinese and foreign critics of what is wrong and even accord on remedies for amelioration. Communist Party Chairman, chief executive, and chief of state Xi Jinping and to a lesser degree Prime Minister Li Kegiang, some 18 months in office, are saying all the right things. Xi, unlike his predecessors, even manages to project charm to sell what will be under the best circumstances extremely difficult structural reforms. The new leadership has come down hard on corruption which is not only endemic, but has taken on growing economic aspects with everything from undermining manufacturing quality to facilitating a huge capital flight. It acknowledges that pollution, paralyzing major cities for days and increasingly jeopardizing children’s health, is an economic hazard.
But however clear a new formula would have to be found, the task is daunting. Such a strategy would have to replace the two-pronged drive put into place once the Chinese Communists abandoned Marxist-Leninist-Maoism in all but name. Mao-style autarky was trashed for an enthusiastic welcoming of foreign investment and transfer of technology to build export markets based primarily on abundant cheap labor. But at the same time, Beijing continued the Soviet tradition of enormous expansion of the infrastructure, well beyond contemporary or projected demand.
This Weltanschauung now has eroded dramatically.
The worldwide economic downturn ended an unlimited expansion of markets for Chinese exports. These manufactures had become part of a vast, new production chain in which international companies used Chinese assembly to produce products for sale to the U.S. and the rest of the industrial world at bargain prices. While these operations introduced limited manufacturing, through manipulation of currency and subsidies Beijing was in fact subsidizing foreign buyers. One look at the retail prices of products at an American retailer indicates that some dissident Chinese economists may well be right arguing that a capital-short country was exporting capital to wealthier nations.
Furthermore, Chinese razor thin margins have been jeopardized by rising costs, including growing fuel imports and a flattening out of the labor supply due to the regime’s attempts to stem population growth. For these reasons China already has lost many of the lowest end manufactures to other low-wage competitors; infants garments, for example, to Bangla Desh. There is even some movement because of technological improvements of off-shored manufacturing back to the industrial countries. For example, with America’s shale revolution reducing the price of domestic natural gas to a third of delivered prices of LNG in East Asia, petrochemicals and their plastic products are returning.
At the same time, China’s vast infrastructure expansion is falling victim to a growing credit crunch. Having sailed through the financial crisis with an unprecedented “stimulus” package of $586 billion in November 2008, Beijing created overcapacity and overinvestment. At the same time, local government’s expansion was based on sales of diminishing farmland for industrial and infrastructure development and credit from regional bankers.
The net result of all this is debt that even the government has found difficult to estimate and a fragile financial structure at every level of government. Perhaps more important, it has resulted in an increasingly onerous situation for private developers who carry a disproportionate weight in the overall growth. With stop and go credit policies, intrepid bureaucrats have created new shadow credit organizations beyond the scope of government monetary and fiscal policy.
The generally accepted recipe for solving these problems is to move the economy away from its concentration on investment and exports toward greater consumption and financial liberalization. But, in fact, recent trends have been in the opposite direction, as the government faced dismantling a system which had profited small urban elite enormously with a superficial appearance of modernization. The strongest resistance has come from huge government corporate entities and the welter of smaller SOEs [state owned enterprises] in the hands of regional and local Party apparatchiks. Their influence inside the ruling Communist Party gives them call on capital, even when as often happens, to entities either deficit or bankrupt.
What gave the markets the shivers last week was a statement from Li that a series of defaults were inevitable as the government tries to rationalize. A default by Haixin Steel, a relatively small operation but with ties to coal and iron ore companies was what gave rise to international concern. It also reflects what industry sources believe is a growing collapse with half of the country’s steel mills losing money. A week earlier China experienced its first bond default when Chaori Solar, a small privately owned solar panel maker, was unable to meet interest on Rmb1bn ($163 million) of bonds sold only two years ago.
In the past, the government has always picked up defaulting companies. If that policy is now to be abandoned, it is unclear just how big the debacle will be and whether it could lead to panic. Already world copper and iron prices fell sharply under the pressure of Chinese speculators retreating from their bets on a continued high level of metals production.
To remedy these problems, Xi’s highly publicized reforms, however much pushed by the leadership, are running into the often hidden outcome of past excesses. For example, not only does the attempt to moderate the “one child” policy appear as a lame effort to resolve an already warped sex ratio in the society – female fetus abortions having produced a vast excess of males – but a huge, corrupt bureaucracy created to enforce the strategy is blocking real changes. Furthermore, such side issues as hundreds of thousands of “illegal” births have produced a sizeable population which cannot claim identity from the still deeply held conviction of Party leaders they must control any dissidence through strict monitoring. A similar problem exists for the hundreds of thousands of part-time workers in all the major metropolitan centers, brought in as “cheap labor”, but refused urban citizenship and a right to limited social welfare benefits. The security proponents are allied with local governments in this instance against any “reform” because of the additional costs it would heap on already overburdened local government and the dismantling of authoritarian control of every individual.
While the system does have the support of the Party apparatchiks, a highly touted new urban middle class does not exist. Best estimates are an upper 1% of households — 2.1 million out of about 530 million households — owns 40-50% of the country’s $10.5 trillion worth of real estate and financial assets. That these ultra-rich – many at the Party’s highest echelons – are moving money into foreign real estate and other investments is widely reported. Should they consider moving 30% of their assets abroad, which is a figure rumored in Chinese circles, the much celebrated Chinese monetary reserves of $3 trillion in dollars would be inconsequential in stemming the tide.
This prelude to a cataclysmic readjustment of the Chinese economy is arriving at a time when Western economists and businessmen have had to abandon a long-cherished hope that continued rapid Chinese [and Indian] development would prop up the world economy. But their disillusionment on this aspect is likely to pale into insignificance as the effects of the Chinese slowdown impacts further on commodity producers in Africa, Latin America and Australia.
Beijing leadership’s quandary is that the struggle to refashion the Chinese economy with further liberal economics comes up against the determined effort of the CCP to maintain its power monopoly which forbids just that. For example, the effort to turn the yuan into an international currency requires it become convertible. That would not only jeopardize current export subsidies but would further encourage the flight of capital, largely a function of the corruption in the Party, often at its highest levels.
That produces an explosive environment where almost any scenario is arguable.
sws-03-16-14
Share this:
Sol Sanders: The [Chinese] emperor has no clothes | Zero Hedge
Sol Sanders: The [Chinese] emperor has no clothes | Zero Hedge.
My old friend Sol Sanders has written an important comment on the coming collapse of the Chinese Ponzi scheme. For years now, I have been warning people that the Chinese Communist Party is not above manufacturing economic and financial statistics. During my trip to France last week for an event sponsored by the Global Interdependence Center and the Banque de France, I appalled a group of economists by suggesting that there are no banks in China. Statistics on growth, debt and investment are all a fiction used to manipulate opinion, inside and outside of China.
We all remember the famous quote by Mao Zedong: “Political power grows out of the barrel of a gun.” But how many of us have actually read the book? Here is the full quote famed on 6 November 1938, during Mao’s concluding speech while addressing the “Problems on War and Strategy” on the party’s sixth Central Committee’s sixth Plenary session:
Every Communist must grasp the truth, “Political power grows out of the barrel of a gun.” Our principle is that the Party commands the gun, and the gun must never be allowed to command the Party. Yet, having guns, we can create Party organizations, as witness the powerful Party organizations which the Eighth Route Army has created in northern China. We can also create cadres, create schools, create culture, create mass movements. Everything in Yenan has been created by having guns. All things grow out of the barrel of a gun. According to the Marxist theory of the state, the army is the chief component of state power. Whoever wants to seize and retain state power must have a strong army. Some people ridicule us as advocates of the “omnipotence of war”. Yes, we are advocates of the omnipotence of revolutionary war; that is good, not bad, it is Marxist. The guns of the Russian Communist Party created socialism. We shall create a democratic republic. Experience in the class struggle in the era of imperialism teaches us that it is only by the power of the gun that the working class and the labouring masses can defeat the armed bourgeoisie and landlords; in this sense we may say that only with guns can the whole world be transformed. We are advocates of the abolition of war, we do not want war; but war can only be abolished through war, and in order to get rid of the gun it is necessary to take up the gun.
Enjoy
Chris
The [Chinese] emperor has no clothes
By Sol Sanders
http://yeoldecrabb.com/2014/03/17/the-chinese-emperor-has-no-clothes/
The shudder that relatively minor bad news from China sent through world markets last week was a warning that the halcyon days of Beijing’s economy are over. Indeed, reluctantly because of self-interest and wishful thinking, a universal consensus finally is emerging that the Chinese economy is in deep trouble, a crisis that could perhaps overturn the regime itself.
The cardinal indicator is that the Chinese economy is slowing down. How much, how fast, which sectors, is all open to speculation given the notorious unreliability of Beijing statistics. But certainly we long ago dipped below that 8% minimal annual gross national product growth rate which once was accepted inside and outside the Middle Kingdom as the requirement for political stability.
In a sense, it was inevitable: perhaps the world has no history of a regional economy as large as China’s growing at its phenomenally high rate over the past two decades. But, then, too, it has been obvious to all but the most optimistic that huge aberrations were being built into a wanting modernization process that would eventually haunt the leadership. That’s where we are now.
There is unusual agreement, again, among Chinese and foreign critics of what is wrong and even accord on remedies for amelioration. Communist Party Chairman, chief executive, and chief of state Xi Jinping and to a lesser degree Prime Minister Li Kegiang, some 18 months in office, are saying all the right things. Xi, unlike his predecessors, even manages to project charm to sell what will be under the best circumstances extremely difficult structural reforms. The new leadership has come down hard on corruption which is not only endemic, but has taken on growing economic aspects with everything from undermining manufacturing quality to facilitating a huge capital flight. It acknowledges that pollution, paralyzing major cities for days and increasingly jeopardizing children’s health, is an economic hazard.
But however clear a new formula would have to be found, the task is daunting. Such a strategy would have to replace the two-pronged drive put into place once the Chinese Communists abandoned Marxist-Leninist-Maoism in all but name. Mao-style autarky was trashed for an enthusiastic welcoming of foreign investment and transfer of technology to build export markets based primarily on abundant cheap labor. But at the same time, Beijing continued the Soviet tradition of enormous expansion of the infrastructure, well beyond contemporary or projected demand.
This Weltanschauung now has eroded dramatically.
The worldwide economic downturn ended an unlimited expansion of markets for Chinese exports. These manufactures had become part of a vast, new production chain in which international companies used Chinese assembly to produce products for sale to the U.S. and the rest of the industrial world at bargain prices. While these operations introduced limited manufacturing, through manipulation of currency and subsidies Beijing was in fact subsidizing foreign buyers. One look at the retail prices of products at an American retailer indicates that some dissident Chinese economists may well be right arguing that a capital-short country was exporting capital to wealthier nations.
Furthermore, Chinese razor thin margins have been jeopardized by rising costs, including growing fuel imports and a flattening out of the labor supply due to the regime’s attempts to stem population growth. For these reasons China already has lost many of the lowest end manufactures to other low-wage competitors; infants garments, for example, to Bangla Desh. There is even some movement because of technological improvements of off-shored manufacturing back to the industrial countries. For example, with America’s shale revolution reducing the price of domestic natural gas to a third of delivered prices of LNG in East Asia, petrochemicals and their plastic products are returning.
At the same time, China’s vast infrastructure expansion is falling victim to a growing credit crunch. Having sailed through the financial crisis with an unprecedented “stimulus” package of $586 billion in November 2008, Beijing created overcapacity and overinvestment. At the same time, local government’s expansion was based on sales of diminishing farmland for industrial and infrastructure development and credit from regional bankers.
The net result of all this is debt that even the government has found difficult to estimate and a fragile financial structure at every level of government. Perhaps more important, it has resulted in an increasingly onerous situation for private developers who carry a disproportionate weight in the overall growth. With stop and go credit policies, intrepid bureaucrats have created new shadow credit organizations beyond the scope of government monetary and fiscal policy.
The generally accepted recipe for solving these problems is to move the economy away from its concentration on investment and exports toward greater consumption and financial liberalization. But, in fact, recent trends have been in the opposite direction, as the government faced dismantling a system which had profited small urban elite enormously with a superficial appearance of modernization. The strongest resistance has come from huge government corporate entities and the welter of smaller SOEs [state owned enterprises] in the hands of regional and local Party apparatchiks. Their influence inside the ruling Communist Party gives them call on capital, even when as often happens, to entities either deficit or bankrupt.
What gave the markets the shivers last week was a statement from Li that a series of defaults were inevitable as the government tries to rationalize. A default by Haixin Steel, a relatively small operation but with ties to coal and iron ore companies was what gave rise to international concern. It also reflects what industry sources believe is a growing collapse with half of the country’s steel mills losing money. A week earlier China experienced its first bond default when Chaori Solar, a small privately owned solar panel maker, was unable to meet interest on Rmb1bn ($163 million) of bonds sold only two years ago.
In the past, the government has always picked up defaulting companies. If that policy is now to be abandoned, it is unclear just how big the debacle will be and whether it could lead to panic. Already world copper and iron prices fell sharply under the pressure of Chinese speculators retreating from their bets on a continued high level of metals production.
To remedy these problems, Xi’s highly publicized reforms, however much pushed by the leadership, are running into the often hidden outcome of past excesses. For example, not only does the attempt to moderate the “one child” policy appear as a lame effort to resolve an already warped sex ratio in the society – female fetus abortions having produced a vast excess of males – but a huge, corrupt bureaucracy created to enforce the strategy is blocking real changes. Furthermore, such side issues as hundreds of thousands of “illegal” births have produced a sizeable population which cannot claim identity from the still deeply held conviction of Party leaders they must control any dissidence through strict monitoring. A similar problem exists for the hundreds of thousands of part-time workers in all the major metropolitan centers, brought in as “cheap labor”, but refused urban citizenship and a right to limited social welfare benefits. The security proponents are allied with local governments in this instance against any “reform” because of the additional costs it would heap on already overburdened local government and the dismantling of authoritarian control of every individual.
While the system does have the support of the Party apparatchiks, a highly touted new urban middle class does not exist. Best estimates are an upper 1% of households — 2.1 million out of about 530 million households — owns 40-50% of the country’s $10.5 trillion worth of real estate and financial assets. That these ultra-rich – many at the Party’s highest echelons – are moving money into foreign real estate and other investments is widely reported. Should they consider moving 30% of their assets abroad, which is a figure rumored in Chinese circles, the much celebrated Chinese monetary reserves of $3 trillion in dollars would be inconsequential in stemming the tide.
This prelude to a cataclysmic readjustment of the Chinese economy is arriving at a time when Western economists and businessmen have had to abandon a long-cherished hope that continued rapid Chinese [and Indian] development would prop up the world economy. But their disillusionment on this aspect is likely to pale into insignificance as the effects of the Chinese slowdown impacts further on commodity producers in Africa, Latin America and Australia.
Beijing leadership’s quandary is that the struggle to refashion the Chinese economy with further liberal economics comes up against the determined effort of the CCP to maintain its power monopoly which forbids just that. For example, the effort to turn the yuan into an international currency requires it become convertible. That would not only jeopardize current export subsidies but would further encourage the flight of capital, largely a function of the corruption in the Party, often at its highest levels.
That produces an explosive environment where almost any scenario is arguable.
sws-03-16-14
Share this:
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.
Share this:
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.
Olduvaiblog: Musings on the coming collapse 