From the article:
“Actually, the main reason why a deluge of defaults is inevitable, whether Beijing likes it or not, is that as we will report shortly, far from enaging in any deleveraging or “tapering” of credit injections, in the first quarter, Chinese banks saw the biggest increase in their assets in history! And since the bulk of these are in the form of loans going to already insolvent and materially impaired business, all China is doing now is throwing trillions in good money after bad. Which also means that in deciding to delay the Minsky unwind if only by a few months, China has just assured that when the collapse finally comes, it will be that much more acute.”
– Second Chinese Bond Default On Deck (ZeroHedge, July 17, 2014):
It seems like it was only yesterday when the first official Chinese corporate default in history (there have been many other ones in the past but all were quickly masked by the government to avoid a panic), Chaori Solar, entered the history books. Now it’s time for default number in the country’s onshore bond market as Huatong Road & Bridge Group, a company whose businesses includ bridge and highway construction, real estate, coal, eco-friendly construction materials and agriculture-related projects, based in the northern province of Shanxi, said it may miss a 400 million yuan ($64.5 million) note payment due July 23, according to a statement to the Shanghai Clearing House yesterday.
As now traditionally happens in China, first the company is exposed for being a fraud (with its management admitting to its sins, never to be seen again) and then the corporate bondholders are left holding the bag. This time won’t be any different: according to Bloomberg Chairman Wang Guorui is “assisting authorities with an official investigation.” Wang was removed from the Chinese People’s Political Consultative Conference Shanxi Committee on July 9 for suspected violations of the law, according to an official statement and media report last week.
What happens next is clear: “It’s very likely the company will default,” said Xu Hanfei, a bond analyst at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “If it does, the event will have a big impact on investors’ risk sentiment.”
Another staple of Chinese bond defaults: when reached for comment, the now shell of an insolvent company always refuses to make any comment:
An operator who answered the main line of Huatong Road today wouldn’t comment on the issues and declined to transfer the call to related people.
Also, it appears when it comes to default risk, China’s rating agencies are about as ahead of the curve as their US peers: “China Lianhe Credit Rating Co. cut the company’s rating to BB+ from AA- to reflect the builder’s high default risks, according to a statement from the risk assessor today.”
Some more on Huatong:
Huatong Road said in its statement yesterday that it’s exploring various channels to raise funds to pay off the one-year bond, according to the statement. It owes 429.2 million yuan in interest and principal by the due date, it said. The builder, which was set up in 1998, had 5.8 billion yuan of debt and 10.7 billion yuan of assets as of March 31, according to a separate statement in April on the Chinamoney website. It reported a profit of 62.7 million yuan for the first quarter.
We can’t wait to find out just how many of those “billions” in assets have been rehypothecated countless times leading to pennies on the dollar, if any, recoveries for bondholders.
As for the big picture:
“The possible default of Huatong Road is another sign of increasing default risk among small and weak bond issuers in China as slower growth hits companies in sectors that are struggling with overcapacity and tougher financing conditions,” said Christopher Lee, Hong Kong-based managing director of corporate ratings at Standard & Poor’s. “Builders are vulnerable as the property downturn has curtailed construction investment which weakens their order book and revenues.”
“Possibility of government intervention is low. Since last year, the new administration has been taking a more market-oriented approach,” said Ivan Chung, Hong Kong-based senior vice president at Moody’s Investors Service. “Regulators realize that if they provide support by intervening, it will also create more moral hazards, which is not good for the market.”
Chung said more defaults may occur in sectors that are facing overcapacity, such as construction, steel and commodities.
Actually, the main reason why a deluge of defaults is inevitable, whether Beijing likes it or not, is that as we will report shortly, far from enaging in any deleveraging or “tapering” of credit injections, in the first quarter, Chinese banks saw the biggest increase in their assets in history! And since the bulk of these are in the form of loans going to already insolvent and materially impaired business, all China is doing now is throwing trillions in good money after bad. Which also means that in deciding to delay the Minsky unwind if only by a few months, China has just assured that when the collapse finally comes, it will be that much more acute.
The weakest link in the Eastern Bloc Putin is building so masterfully is China. The Chinese adopted Enron Accounting and fueled their entire national economy by using it. Putin has some good alliances with South Africa, Brazil and maybe India……I don’t know enough about their economy or how they handle money to say…….but China is a liability.
Enron accounting for those who don’t recall literally spun straw into gold. Enron would take a debt of $100 million, move it off their books into a shell corporation. That would remove the large debt from their ledger, making their profits look stronger, and their bottom line healthier.
The debt they moved into the shell corporation was listed as an asset. The shell would then given Enron a huge work order of say $100 million……….this would add greatly to their income line. As long as the market went up this worked, and they moved a lot of debt into an array of shell corporations and created fake work orders that went into the billions.
Once the market started moving south (it was not yet totally rigged by big business), Enron quickly collapsed. It turned out Global Crossing, WorldCom, and several other large corporations were practicing the same accounting…..they all imploded within weeks of each other.
Millions of jobs were lost, along with pensions, homes, cars………it was a vicious economic assault on the once sterling US markets.
Nothing was done to punish the wrongdoers, and millions lost everything. Stocks compressed to pennies on the dollar, this is when the greedy guts were able to move in and buy up, and take over the market.
But, China adopted all of this, and dumped the richer side of their culture. Extended families vanished, children no longer care for their elders, and there is no system like Social Security in place to help them survive.
They dumped the medical care that took care of all, and now, if you have money you get care, if not, you die. All the wonderful aspects of the Chinese culture was thrown aside to adopt western ways. What a loss.
One custom they had was to end each year debt free. That is gone. The gambling that Chinese have always loved has moved to their markets, and now, like the US, nothing is as it seems.
They still punish wrongdoers, hopefully, they will continue that practice. But, their accounting and market is as shaky as they get………..
I hope Putin is putting some safeguards in place, because I would not trust China. If he isn’t, the growth I see coming could be destroyed by Chinese crooks.