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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.

 

 

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.

In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.

The PBOC’s overnight release:

The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:

 

Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.

 

People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.

Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.

Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”

The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:

the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.

 

The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.

 

A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.

 

The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.

For some even the doubling in the rate band is not enough:

Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.

But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.

Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.

 

That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.

 

As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.

 

“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.

One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.

* * *

Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.

UBS

 

  • The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
  • Action doesn’t have direct implications for direction of CNY against USD
  • UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
  • Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang

Morgan Stanley

  • “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
  • Wider yuan band will help deter “carry trade speculators” as volatility increases
  • Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
  • Recent CNY depreciation created precondition for band widening

Commonwealth Bank of Australia

  • With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
  • Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
  • Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years

BEA

  • PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
  • Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
  • Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization

Bank of America

  • Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
  • PBOC wants to widen band when market view is more balanced
  • Not very surprising in terms of band-widening timing
  • Another band widening this year is unlikely
  • Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
  • Long-dated NDFs could weaken further, though not necessarily the daily official fixings
  • Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation

ANZ

  • With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
  • Yuan band widening didn’t come as a surprise
  • Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
  • Another widening won’t come so soon given the last move was 2 yrs ago in 2012

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.

In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.

The PBOC’s overnight release:

The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:

 

Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.

 

People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.

Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.

Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”

The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:

the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.

 

The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.

 

A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.

 

The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.

For some even the doubling in the rate band is not enough:

Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.

But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.

Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.

 

That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.

 

As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.

 

“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.

One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.

* * *

Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.

UBS

 

  • The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
  • Action doesn’t have direct implications for direction of CNY against USD
  • UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
  • Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang

Morgan Stanley

  • “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
  • Wider yuan band will help deter “carry trade speculators” as volatility increases
  • Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
  • Recent CNY depreciation created precondition for band widening

Commonwealth Bank of Australia

  • With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
  • Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
  • Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years

BEA

  • PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
  • Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
  • Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization

Bank of America

  • Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
  • PBOC wants to widen band when market view is more balanced
  • Not very surprising in terms of band-widening timing
  • Another band widening this year is unlikely
  • Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
  • Long-dated NDFs could weaken further, though not necessarily the daily official fixings
  • Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation

ANZ

  • With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
  • Yuan band widening didn’t come as a surprise
  • Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
  • Another widening won’t come so soon given the last move was 2 yrs ago in 2012

China’s Credit Nightmare Explained In One Chart | Zero Hedge

China’s Credit Nightmare Explained In One Chart | Zero Hedge.

Everyone knows that after years of kicking the can and resolutely sticking its head in the sand, China is finally on the verge, if hasn’t already crossed it, of a major credit event, confirmed by the first ever corporate bond default which took place a week ago. Few, however, know just why China is in this untenable position. If we had to select one data point with which to explain it all, it would be the following: just in the fourth quarter of 2013, Chinese bank assets rose from CNY147 trillion to CNY151.4 trillion, or, in dollar terms, an increase of almost exactly $1 trillion!

By comparison, US bank assets in the same period rose by just over $200 billion, a number which consists almost entirely of the reserves injected by the Fed.

And if we had to show it in one chart, it would be the following comparison of total Chinese and US bank assets: the two lines shown below are on the same axis, and at the end of 2009, the US had just a fraction more assets than China. Since then the US has added $2.3 trillion in bank assets, exclusively thanks to the Fed’s reserve creation. As for China… total bank assets more than doubled from $11.5 trillion to a record $25 trillion! This is a number that is nearly double that of the US, and represents a pace of $3.5 trillion per year – or nearly four concurrent QEs – a rate of “financial asset” addition five times greater than in the US!

 

Another way of showing just the past three years:

 

What’s worse: China is now hooked to a “flow” pace of $3.5 trillion each and every year, just to generate an annual GDP of about 8% and declining with every passing year. Any reductions in the pace of monetary flow will have magnified implications on China’s growth, and from there, social, and globa, stability.

But what does this really mean? Simple: in this epic, unprecedented, feverish pace to “grow” the economy and create hot, if worthless, money out of assets, all assets, even “magic” assets (i.e. thin air), the following took place:

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.

Until now nobody cared because defaults were prohibited in China and nobody really cared what was underneath the hood. Now, defaults are allowed and, in fact, are encouraged. Which is why suddenly everyone is starting to cast curious glances into the dark shadows where the engine is supposed to be.

They won’t like what they find.

Curious for more: read Chart Of The Day: How China’s Stunning $15 Trillion In New Liquidity Blew Bernanke’s QE Out Of The Water, and Some Stunning Perspective: China Money Creation Blows US And Japan Out Of The Water

China's Credit Nightmare Explained In One Chart | Zero Hedge

China’s Credit Nightmare Explained In One Chart | Zero Hedge.

Everyone knows that after years of kicking the can and resolutely sticking its head in the sand, China is finally on the verge, if hasn’t already crossed it, of a major credit event, confirmed by the first ever corporate bond default which took place a week ago. Few, however, know just why China is in this untenable position. If we had to select one data point with which to explain it all, it would be the following: just in the fourth quarter of 2013, Chinese bank assets rose from CNY147 trillion to CNY151.4 trillion, or, in dollar terms, an increase of almost exactly $1 trillion!

By comparison, US bank assets in the same period rose by just over $200 billion, a number which consists almost entirely of the reserves injected by the Fed.

And if we had to show it in one chart, it would be the following comparison of total Chinese and US bank assets: the two lines shown below are on the same axis, and at the end of 2009, the US had just a fraction more assets than China. Since then the US has added $2.3 trillion in bank assets, exclusively thanks to the Fed’s reserve creation. As for China… total bank assets more than doubled from $11.5 trillion to a record $25 trillion! This is a number that is nearly double that of the US, and represents a pace of $3.5 trillion per year – or nearly four concurrent QEs – a rate of “financial asset” addition five times greater than in the US!

 

Another way of showing just the past three years:

 

What’s worse: China is now hooked to a “flow” pace of $3.5 trillion each and every year, just to generate an annual GDP of about 8% and declining with every passing year. Any reductions in the pace of monetary flow will have magnified implications on China’s growth, and from there, social, and globa, stability.

But what does this really mean? Simple: in this epic, unprecedented, feverish pace to “grow” the economy and create hot, if worthless, money out of assets, all assets, even “magic” assets (i.e. thin air), the following took place:

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.

Until now nobody cared because defaults were prohibited in China and nobody really cared what was underneath the hood. Now, defaults are allowed and, in fact, are encouraged. Which is why suddenly everyone is starting to cast curious glances into the dark shadows where the engine is supposed to be.

They won’t like what they find.

Curious for more: read Chart Of The Day: How China’s Stunning $15 Trillion In New Liquidity Blew Bernanke’s QE Out Of The Water, and Some Stunning Perspective: China Money Creation Blows US And Japan Out Of The Water

Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years) | Zero Hedge

Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years) | Zero Hedge.

The last 7 days have seen the unstoppable ‘sure-thing’ one-way bet of the decade appreciation trend of the Chinese Yuan reverse. In fact, the 0.95% sell-off is the largest since 1994 (bigger than the post-Lehman move) suggesting there is clear evidence that the PBOC is intervening.

 

The fact that this is occurring with relatively stable liquidity rates (short-term repo remains low) further strengthens the case that China just entered the currency wars per se as SocGen notes, intending to discourage arbitrage inflows. For the Chinese authorities, who do not care about the level of their stock market (since ownership is so low), and specifically want to tame a real-estate bubble, thisintentional weakening is clearly aimed at trade – exports (and maintaining growth) as they transition through their reforms. The question is, what happens when the sure-thing carry-trade goes away?

BofA notes the puzzling divergence between Yuan fixings and short-term liquidity,

The turn of the Chinese New Year brought the People’s Bank of China (PBoC) back into action – it not only restarted repo operations to withdraw liquidity, it actually did it at a much higher rate. The 7d reverse repo rate at which the PBoC injects liquidity is 75bp higher than a year ago, a move considered by the market as a 75bp rate hike over the last year. The new 14d repo (liquidity withdrawal) rate is set at 3.8%, 105bp higher than the rate when 28d repo was last conducted on 6 June 2013. Based on a simple framework, this move is equivalent to another 35bp rate hike (Rate corridor, Chinese style, 18 February 2014).

The puzzle is that both money and bond markets nearly totally ignored such an operation. The 7d repo rate is now fixed nearly 200bp lower since 10 February. Such a massive liquidity improvement in the face of the PBoC’s liquidity withdrawal is puzzling, since by 10 February most of the cash used during Chinese New Year should have flowed back into the financial system already.

The FX market move also begs the question as to why liquidity improved over the last couple of weeks. Generally, the onshore repo rate rises as the RMB weakens against fixing; a normal development because FX outflow dries up liquidity. However, the move in February turned things upside down. Look at the sharp divergence between rates and FX

Which leaves 2 possible reasons for the divergence

It is due to the seasonality of outflows, as this year could be made worse because the onshore rate was much higher before the Chinese New Year. As a result, banks might have borrowed more offshore, helping the RMB to appreciate. After the New Year, this flow reverses and pushes the RMB down. This explains why the CNY leads the CNH in spot selloff. It is also consistent with the large January FX purchase position of CNY466bn. The trouble with this explanation is that as the money flows out, the onshore rate should rise, not drop.

A more popular theory or suspicion puts the PBoC behind the move. As the PBoC buys more USD, it creates natural liquidity in the CNY, leading to much lower repo rates. This explanation is consistent with CNY leading the move, as CNY and CNH spots moved much more than forward, all suggesting a domestic investor-driven rather than foreign investor-driven endeavor. The trouble with this explanation is that the market will have difficulty proving it one way or the other without the central bank explicitly admitting it.

As SocGen notes, the latter makes more sense…

In just short seven days, the once unstoppable appreciation trend of the yuan is reversed. The USD/CNY spot has depreciated by 0.8% since 17 February and the USD/CNH has weakened by more than 1.1%. As for the causes, there is clear evidence of intervention from the People’s Bank of China. We think that the recent yuan move is intended to discourage arbitrage inflows. If short-term capital inflows abate, the depreciation will probably halt.

Ending the inexorable carry trade…

The yuan appreciated by nearly 3% against the greenback and 7% against in nominal effective exchange rate terms in 2013. Over the same period, China’s FX reserves added another $500bn, despite the repeated talk from officials that China has had enough reserves. These seemingly contradictory messages and signs, in our view, suggest that the PBoC never really wants too much yuan appreciation, especially if it is driven by short-term speculative capital inflows.

Which is crucial…

The yuan possesses the very two qualities of a carry trade currency: high onshore interest rates and a gradual but steady appreciation trend. The first quality is partly caused by the Fed’s easing policy and partly by the PBoC’s reluctance to ease domestic liquidity conditions out of concerns over debt risk. This condition is unlikely to weaken significantly in the near term. However, the PBoC is capable of altering the second condition and it seems that it is doing exactly so by reversing the appreciation trend and pushing up the volatility of the yuan.

If we are right about the reason behind the surprising deprecation of the yuan, what will follow next?

– Band-widening? Maybe, but as we have argued before, what matters is how the PBoC manages the currency. To make real difference, we think that the next step in yuan reform should be bolder: the PBoC should move from daily to weekly (or even monthly) setting of the reference rate, while at the same time widening the currency band.

– More depreciation? Probably not much more. Although the central bank does not like too much capital inflows, too much outflows will not be its choice either. The monthly FX position data are something to track for any change in the capital flow direction. A timelier indicator is the spread between CNH and CNY spot rate. If the offshore rate stays persistently weaker than the onshore one by a certain margin, that will be a sign of capital outflows. Then the PBoC will most likely choose to stabilise the yuan again.

The end-result is a concern:

Should the RMB weakening last a while longer, the cross border carry arbitrage flow which has been massive could reverse and lead to higher repo rates. Such a flattening force is a real threat, especially when the PBoC has shown no sign of lowering the repo rates in its operations.

But this certainly will not please the Japanese (trying to devalue and manufacture their own recovery) or any other beggar thy neighbor nation. Welcome to the Currency Wars China… (and we warned here, prepare for more carry unwind and a potential risk flare).

Potential asset deflation is a risk, as the carry trades diminish/unwind. Property prices are at risk – the collateral value for China’s financial systems. This is not a dire projection – it simply seeks to isolate the US QE as a key driver of China’s monetary policy and asset inflation, and highlights the magnitudes involved, and the transmission mechanism. Investors should not imbue stock-price movements and property price inflation in China with too much local flavor – this is mainly a US QE-driven story, in our view.

And lastly, as a bonus chart, we thought the correlation here was interesting…

Average:

The Chinese Dominoes Are About To Fall: Complete List Of Upcoming Trust Defaults | Zero Hedge

The Chinese Dominoes Are About To Fall: Complete List Of Upcoming Trust Defaults | Zero Hedge.

As has been widely reported on these pages in the past month, after a near-reality experience almost claimed the first material Chinese shadow banking default, the Chinese government and central bank did what they do best: a mysterious “white knight” emerged out of nowhere, and bailed out the Credit Equals Gold #1 Trust. A few days later, we reported that China Development Bank lent 2 billion yuan to coal company Shanxi Liansheng, which owes almost 30b yuan to lenders including banks, trusts and asset management firms. And while we know how “difficult” it was for China to do the wrong thing and encourage moral hazard, despite repeated assurances by one after another PBOC director that this time the central bank means business, we have good news: these two narrowly averted Trust defaults are just the beginning – it is all downhill from here.

As Bank of America reports in an analysis by David Cui, the Trust defaults are about to get hot and heavy. To wit:

We believe that during April to July the market may see many trust products threatening to default, especially those related to coal mines. By our estimate, the first real default most likely could happen in May with a Sichuan lead/zinc trust product worth Rmb140mn. This is because the product is relatively small (so the government may use it as a test case), the underlying asset is not attractive (so little chance of 3rd parties taking it over) and we also have heard very little on parties involved trying to work things out. Whether this will trigger an avalanche of future trust defaults remains to be seen and this presents a key risk to the market in our opinion.

 

… it’s still possible that many of the upcoming cases in Apr-July may get worked out one way or the other. Nevertheless, as we believe that many of the underlying assets of the trust products are insolvent, it’s a matter of time that many products will ultimately default, in our view. Various bail-outs will only delay the inevitable.

From BofA’s David Cui

12 potential defaults reported by the media

Table 1 summarizes the information on the 12 major potential defaults in the trust industry that have been reported by the media. Most of them are coal mine related and heavily concentrated in one area, Shanxi Province. So far it seems to us that most of them may get extended upon the due date. The only exception over the next few months appears to be a product issued by China Credit Trust for a lead and zinc miner in Sichuan, Nonggeshan. Even without any major default over the next few months, the process of debt restructuring can be messy and weigh heavily on market sentiment.

19 Feb 2014, Rmb109mn borrowed by Liansheng & arranged by Jilin Trust

  • Details: This Rmb109mn tranche is part of a six-tranche trust product worth a total of Rmb973mn arranged by Jilin Trust for Liansheng, a Shanxi coal miner. The other five tranches have matured since 2H 2013 and remain overdue.
  • Potential outcome: Repayment may be extended.
  • Reason: Liansheng is undergoing a debt restructuring coordinated by the Shanxi provincial government. 1) The provincial government plans to help out involved financial institutions to ensure the region’s access to ongoing financing. According to people close to the situation, the implicit guarantee practice will most likely continue with the Liansheng’s case. 2) Trust companies may have to follow banks to help the miner out. Banks have agreed to extend their mid/long term loans by three years. Top 3 banks have total debts of Rmb10.6bn to Liansheng; top 3 trust lenders, Rmb3.7bn.

(Shanghai Securities News, 2/11; Economic Information, 2/13)

21 Feb 2014, Rmb500mn borrowed by Liansheng & arranged by Shanxi Trust

  • Potential outcome: repayment may be extended.
  • Reason: Same as the Jilin Trust case.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

07 Mar 2014, Rmb664mn borrowed by Liansheng & arranged by Changan Trust

  • Details: Other than the Rmb664mn product to mature on Mar 7, Changan Trust arranged another two products for Liansheng, totaling Rmb536mn which matured in Nov 2013. Both products remain overdue.
  • Potential outcome: repayment may be extended.
  • Reason: Same as the other Liansheng cases.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

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 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.

(Source: Financial Planning Weekly, 3/6/2013; Guangzhou Daily, 4/6/2013, Boxun, 5/10/2013)

14 May 2014, Rmb1.5bn borrowed by Liansheng & arranged by China Jiangxi International Trust

  • Potential outcome: repayment may be extended.
  • Reason: Same as the other three Liansheng cases.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

30 May 2014, Rmb140mn borrowed by Nonggeshan & arranged by China Credit Trust

  • Details: invested in a lead and zinc mine in Sichuan.
  • Potential outcome: Likely to default.
  • Reasons: 1) Compared to coal mines of Zhenfu and Liansheng, the lead and zinc mine is a much less attractive asset: it is located in the mountains over 5,000 meters in altitude, inaccessible for 6 months of the year due to weather conditions, with low lead/zinc content; 2) According to an unnamed regulator, the central government is comfortable with trust defaults in the range of Rmb100-200mn.

(Source: 21st Century Business Herald, 31/7/2012; Caiing, 1/27)

25 Jul 2014, Rmb1.3bn borrowed by Xinbeifang & arranged by China Credit Trust

  • Details: Xinbeifang is another Shanxi coal miner.
  • Potential outcome: repayment may be extended.
  • Reason: Xinbeifang is negotiating with an SOE to sell some of its coal mine assets.

(Source: China Securities Journal, 1/15)

27 Jul 2014, Rmb319mn borrowed by Hongsheng & arranged by Huarong Trust

  • Details: Hongsheng is a Shanxi coal miner. Huarong sold another trust product for it which will mature in 4 September 2014, worth Rmb63mn.
  • Potential outcome: repayment may be extended.
  • Reason: Hongsheng may have assets to secure more financing. It issued these two trust products to replace another trust product that matured in Q3 2012. The owner also issued other trust products using his personal property assets as collateral and raised Rmb1.2bn.

(21st Century Business Herald, 20/12/2013)

7 Sept 2014: Rmb400mn borrowed by Zengdai & arranged by CCB Trust

  • Details: 1) The proceeds of the product were invested in financial markets. 2) Its 1st tranche, worth Rmb400mn, matured in Mar 2013 with a 38% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the product to Sept 2014. 3) Its 2nd tranche, worth Rmb359mn, matured in June 2013 with a 31% loss vs. an expected return of 20-30%. Investors agreed to extend the maturity of the 2nd tranche to Dec 2014.
  • Potential outcome: The trust company and the investment company may share the losses.
  • Reasons: 1) The investment company refused to repay investors in full at the original due date so the trust company may have to chip in; 2) By Jan 2014, the 1st tranche reported a narrower loss of 24%, and the 2nd tranche, also a narrower loss of 13%; 3) Zengdai may pay on behalf of its investment company for reputation’s sake.

(Source: Securities Daily, 9/7/2013; CCB Trust)

20 Nov 2014, Rmb600mn borrowed by Liansheng & arranged by China Jiangxi Int’l Trust

  • Potential outcome: repayment may be extended.
  • Reason: Same as the other Liansheng cases.

(Caiing 1/27; China Securities Journal, 1/27; 21st Century Business Herald, 2/14)

23 Dec2014: Rmb1.1bn borrowed by Xiaoyi Dewei & arranged by China Resources Trust

  • Details: Xiaoyi Dewei is a Shanxi coal miner. The trust product originally matured in Dec 2013 but repayment was extended to Dec 2014.
  • Potential outcome: Likely to default.
  • Reason: Both the miner and the trust company refused to repay investors in full at the original due date. There has been no reporting on asset sales by Xiaoyi Dewei.

(Source: Financial Planning Weekly, 11 Nov 2013)

15 Jan 2015, Rmb1.2bn borrowed by Hongsheng’s owner & arranged by Minmetals Trust

  • Details: the collateral is the Shanxi coal miner’s personal property assets.
  • Potential outcome: May be replaced by a new trust product.
  • Reason: Same as the July 2014 Rmb319mn trust product issued by Huarong Trust.

(21st Century Business Herald, 20/12/2013)

2Q/3Q 2014 – the next peak maturing period for collective trusts

We consider the trust market the most vulnerable part of the major financing channels for companies, i.e. loan, corporate bond and trust. The quality of the borrowers in the trust market tends to among the lowest. Within the trust market, collective trust products, i.e. those sold to more than one investor, tend to be risker than single trust products, i.e. those sold to a single investor. This is because investors in single trust products tend to be more substantial in resources, thus most likely more sophisticated in their risk control.

The Wind database lists close to 12,000 collective trust products, worth Rmb1.34tr, which cover roughly half of the collective trust market (Rmb2.72tr as of the end of 2013). It has reasonably good quality data series on the issuing dates and amounts raised. However, data on maturing dates are sporadic. We estimate that the average duration of the trust products is around 2 years. Based on this assumption and the issuing dates, we have mapped out a rough maturing profile of the collective trust market. As we can see from Chart 1, 2Q and 3Q this year will be the next peak maturing period for this market.

Coal mine trusts maturity schedule

We went through the offering documents of the top 200 collective trust products by size (the smallest being Rmb400mn), worth some Rmb145bn in total. They represent roughly 10% of the trust products in the Wind database and 5% of the overall collective trust market. We identified the industries of the issuers, the regions where their businesses are located and the maturity dates of the products. Table 2 summarizes the results.

We believe that coal mine trusts are the most likely to default over the coming months because 1) coal price has dropped sharply in recent quarters; 2) most of the issuers are private enterprises; and 3) they tend to be from provinces whose governments rely heavily on resources related income, e.g., Shanxi and Inner Mongolia. On the other hand, the property market has been reasonably buoyant in recent times while LGFVs generally have access to re-financing until the implicit guarantee is removed (a whole different topic worthy another report later). Based on the maturing schedule of the top 200 collective trust products, we expect more noise about coal mine trust defaults around Apr, June and July (Chart 2).

Table 3 lists the coal mine trust products that are in our study.

For the trust market, we only have data on approximately half of the collective trust market, which in turn, accounts for about a quarter of the overall trust market. So essentially, we only covered about 1/8 of the total trust market with our analysis. Single trusts are less risky than collective trusts. Nevertheless, if the solvency issue is a systemic problem as we expect, many single trusts will ultimately default by our assessment.

Our analysis has largely zoomed in on coal mine trusts because they represent the clear and present danger given how depressed the coal market has been. However, property related trusts may come under increasing pressure as we sense that the property market may be turning south in small cities. As a result, some of those related products may threaten to default reasonably soon. Then we have the big unknown – LGFV trusts. Whether and when they may default is largely a political decision in our opinion.

China Folds On Reforms – Bails Out 2nd Shadow-Banking Default After “Last Drop Of Blood” Threats | Zero Hedge

China Folds On Reforms – Bails Out 2nd Shadow-Banking Default After “Last Drop Of Blood” Threats | Zero Hedge.

As we showed over the weekend, it is abundantly clear that for all the talk of reform, Chinese authorities have found the gap between words and deeds uncrossable. First, Chinese authorities bailed out the relatively small CEG#1 Trust (for fear of contagion); second, the PBOC injects CNY 375 bn into short-term repo to save banks from a liquidity crisis at year-end; third, total social financing rose by the largest amount on record in January (despite all the talk of deleveraging following the Plenum); and now, fourth, thanks to a CNY 2bn loan (to an entirely insolvent coal company), Chinese authorities have bailed out a 2nd wealth-management product – this time even smaller.

We noted the “technical default” of Jilin Trust last week, and despite its de minimus size, China Development Bank loaned CNY 2bn to the verge-of-bankruptcy Liansheng coal company, and thus bailed out investors in the trust –  piling on the moral hazard.

The Jilin Trust default, as we noted last week, was the second notable ‘technical’ default among Chinese wealth management products recently and caused consternation among investors:

Investors in the Jilin Trust product are demanding that CCB also take responsibility for compensating investors, 21st Century Business Herald reported on Friday.

Bankers have warned that China’s lenders are exposed to vast swathes of loans extended by their non-bank partners and sold to bank clients as off-balance-sheet wealth management products. Though banks are not legally responsible for repaying investors in such cases, they may face pressure to do so in order to maintain their reputations and uphold social stability.

“A few days ago, we went looking for CCB. CCB’s leader in Shanxi still says it’s not his responsibility. In the end, if they really don’t take responsibility, we’ll go to CCB and fight a war to the last drop of blood,” the paper quoted an unnamed product investor as saying.

Investors told the paper that all paperwork and fund transfers related to their purchase of the Jilin Trust product had occurred on CCB’s premises and CCB sales staff had verbally assured investors that the product carried no risk. They also said their willingness to invest was based on their confidence in CCB as a large state-owned bank.

And so what do the Chinese authorities do? Instead of letting a small trust face actual losses, they do what JPMorgan warned would “amplify future losses”

Via Bloomberg,

China Development Bank lent 2b yuan to coal company Shanxi Liansheng, which owes almost 30b yuan to lenders including banks, trusts and asset management firms, 21st Century Business Herald reports, citing unidentified people.

The policy bank is the co.’s largest creditor, with 4.51b yuan in outstanding loans, the report says

The loan will be used to repay maturing trust products sold to retail investors: report

Three local firms will also pay 3b yuan to buy 50 percent of Liansheng, which is based in the northern province of Shanxi, the report says, without identifying cos buying stake

Funds from the stake sale will also be used to repay maturing trust products: report

Repayment of bank loans and single trusts will be delayed

Liansheng, the largest private coal miner in Shanxi, is owned by Chinese entrepreneur Xing Libin, according to the report

Liansheng borrowed more than 5b yuan through 6 Chinese trust firms including Jilin Province Trust and Chang’an Trust, China Securities Journal reports separately, citing unidentified people.

As a reminder, this is what one analyst said of the Chinese coal industry that just got yet another bailout:

Shares of China’s biggest listed coal producers have dropped to their lowest valuations on record as falling fuel prices make it harder to repay debt.

China’s coal industry is “dead,” said Laban Yu, a Jefferies Group LLC analyst in Hong Kong with an underperform rating on all three stocks. “There are 10,000 producers in China. A lot of them are taking on debt. It gets harder and harder to service debts when coal prices keep falling.

Of course, it’s not over yet – as the following chart shows, there are a lot more “maturing” trusts to come in the next 3 months alone…

Allowing investors to be bailed out merely exacerbates the risk-taking mentality and solidifies a belief in a government back-stop (to 10%-yielding highly risky loans to an insolvent industry!!)…

As we previously noted,

…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).

Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.

Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.

So the PBOC’s efforts are merely exacerbating the situation for the worst companies…

China Spurs Market Rout Blamed on Fed, Goldman Sachs AM Says – Bloomberg

China Spurs Market Rout Blamed on Fed, Goldman Sachs AM Says – Bloomberg.

By Benjamin Purvis and Candice Zachariahs  Feb 7, 2014 12:56 AM ET

China’s policy shifts are a bigger driver of the selloff in emerging markets than the Federal Reserve’s decision to dial back stimulus, according to Goldman Sachs Asset Management.

Volatility will rise toward its long-term average and that means an increase in risk premiums, said Philip Moffitt, head of fixed income in Sydney for Asia and the Pacific at Goldman Sachs Asset Management, which had $991 billion of assets under supervision worldwide as of September. The risks for different emerging economies will become more idiosyncratic and Mexico presents a buying opportunity following the rout, he said.

Markets from Turkey to South Africa and Argentina were roiled during the past month as investors sold off emerging-economy currencies, stocks and bonds, prompting emergency measures from governments and central banks. The bout of risk aversion follows the Fed’s decision to scale back asset purchases and China’s pledge to rein in leverage and give market forces a more decisive role in allocating resources.

“The selloff in emerging markets has much more to do with China than with Fed tapering,” Moffitt said yesterday in an interview in Sydney. “China’s such a big source of global demand, in particular for other emerging markets, uncertainty’s going to stay high and risk premiums should be expanding.”

Photographer: Andrew Harrer/Bloomberg

Philip Moffitt, head of fixed income in Sydney for Asia and the Pacific at Goldman… Read More

Credit Boom

The worst isn’t over for emerging markets, Mark Mobius, who oversees more than $50 billion in developing nations as an executive chairman at Templeton Emerging Markets Group, said in an interview. Prices can decline further or take time to stabilize, he said.

China’s policy makers have attempted to rein in the unprecedented credit boom they unleashed in 2008-2009 amid the global financial crisis. Money market rates in China have surged, the cost of insuring against credit default by banks has increased and payment difficulties are emerging in the country’s $6 trillion shadow-banking industry.

“They’re looking to create a market that prices credit risk, rather than having prices imposed,” Moffitt said. “In the absence of a strong mechanism for pricing credit risk, there’s likely to be a lot of uncertainty and volatility.”

The world’s second-largest economy is predicted to expand by 7.4 percent this year, the slowest pace since 1990, according to the median estimate in a Bloomberg News survey.

Diverging Outlooks

The slowdown in China comes as the U.S. economy is showing signs of a pickup, allowing the Fed to trim its monthly bond purchases to $65 billion from $85 billion. U.S. growth is expected to accelerate to 2.8 percent in 2014 from 1.9 percent last year, according to a another Bloomberg poll.

Moffitt said investing in Mexico would be his top trade at the moment because the country’s fundamental outlook is strong even though it has been affected by the global selloff.

“There’s been outflow from emerging-market assets and when you get that kind of flow people sell what they can sell, often high-quality assets,” he said. “It will benefit from the strong U.S. growth we’re expecting and there’s the prospect for rate cuts, so Mexico stands out to us on both value and fundamentals.”

To contact the reporters on this story: Benjamin Purvis in Sydney at bpurvis@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net; Garfield Reynolds at greynolds1@bloomberg.net

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