Big Bubble Brutally Bursts ... Bringing Bankruptcies, Bond Busts
We noted last night that Iron Ore futures prices were in free-fall as the vicious circle of China's commodity-collateral-backed shadow banking system unwind hits home amid fears of contagion from the Chaori Solar default. The first domestic Chinese corporate bond default has retail investors running scared as surprise spreads that the local government did not come to the rescue. The deleveraging is now spreading to copper prices (remember the massive cash-for-copper schemes of last year) as borrowers are forced to sell to meet cash calls which in turn drops copper prices, reducing collateral values and tightening credit conditions even more. This is the biggest copper price drop since Dec 2011...
Premier Li Keqiang delivered his first government work report at the opening of the National People’s Congress (NPC) meeting last night. The new government promises to speed up reform, manage debt risks, fight pollution, and yet maintain 7.5% economic growth all at the same time but as SocGen'sWei Yao warns, this is going to be nothing if not challenging. Maybe mindful of a potential miss, Yao points out that policymakers seem to give themselves a small degree of flexibility by using new phrases like “a reasonable range for the growth rate” and “the growth target is
flexible”. Mission intractible or mission impossible?
It’s nerve-wracking to live in the historical moment of an epic turning point, especially when the great groaning garbage barge of late industrial civilization doesn’t turn quickly where you know it must, and you are left feeling naked and ashamed with your dark worldview, your careful preparations for a difficult future, and your scornful or tittering relatives reminding you each day what a ninny you are to worry about the tendings of events. Persevere. There are worse things in this life than not being right exactly on schedule.
While everyone was focusing on the threat of tumbling debt dominoes in China's shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers - the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate - as well as shadow banking - bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.
And just like that the Chinese yuan devaluation has shifted away from the merely "orderly." In the past few hours of trading, China, which as we reported two days ago has started intervening aggressively in the Yuan market, has seen its currency crash by nearly 0.9%, which may not seem like much, but is in fact the largest drop since December of 2008, and at last check was trading at around 6.18, even as the PBOC fixed the CNY reference rate 0.02% higher from the last official close to 6.1214, erasing pivot support point at 6.1346 and 6.1408. Naturally this means that the obverse, the CNYUSD, has crashed to as low as 0.1620. Should this move sustain without reverting, this will be the biggest weekly loss ever! The dramatic move is shown on the chart below.
The seemingly incessant strengthening trend of the Chinese Yuan (much as with the seemingly inexorable rise of US equities or home prices) has encouraged huge amounts of structured products to be created over the past few years enabling traders to position for more of the same in increasingly levered ways. That was all going great until the last few weeks which has seen China enter the currency wars (as we explained here). The problem, among many facing China, is that these structured products will face major losses and as Morgan Stanley warns "real pain will come if CNY stays above these levels," leading to further capital withdrawal, illiquidity, and a potential vicious circle as it appears the PBOC is trying to break the virtuous carry trade that has fueled so much of its bubble economy.
"There is a big flight to quality," warns one trader as the spread between interest rate swaps (implicitly bank risk) and government bonds soared to a record high. This "crisis gauge" flashing red is also followed by 3 month SHIBOR (short-dated interbank lending rates) surging to an 8-month high. China's CDS have jumped 30bps since the Fed taper and as Bloomberg reports that billionaire investors like George Soros and Bill Gross have drawn uncomfortable parallels between the situation in China now and the US before 2008 (when this crisis gauge was key in spotting the carnage to come). Simply put, the banks don't trust each other...
The last 3 days have seen China's Shanghai Composite index tumble over 3% - its largest drop since October as sentiment comes under pressure from concerns about tightening in the real estate sector. The pace of price appreciation has slowed notably - especially 'existing' apartment sales (i.e. the speculators are exiting) - as it appears houing demand is cooling off with the number of cities with falling MoM home prices rose to six in January from two in December.The PBOC has jawboned as much and real estate sector financial condtions are tightening is slowing as a number of banks curb lending to developers. This is weighing on copper prices also as construction activity slows (exacerbating problems in the shadow banking system's collateral pools). The PBOC is getting what they wanted - but may regret it.
"The Pig In The Python Is About To Be Expelled": A Walk Thru Of China's Hard Landing, And The Upcoming Global Harder ResetSubmitted by Tyler Durden on 02/21/2014 10:37 -0400
The die has been cast, and it appears that the world is finally on the path to the great "carry-trade unwind" endgame. If so, this is what it will look like...
... We know how "difficult" it was for China to do the wrong thing when it bailed out two insolvent shadow bank Trusts 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.
You know what’s it like, the driver stands there in front of the car that has just hit you up the back while looking at something happening down the street rather than checking on you hitting your breaks…and yet, he says “sorry, but you stopped too quickly, it wasn’t my bad driving”.
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 - piling on the moral hazard.
Spoos Rise To Within Inches Of All Time High As Overnight Bad News Is Respun As Great News By Levitation AlgosSubmitted by Tyler Durden on 02/17/2014 08:26 -0400
After tumbling as low as the 101.30 level overnight on atrocious GDP data, it was the same atrocious GDP data that slowly became the spin needed to push the USDJPY higher as the market became convinced that like everywhere else, bad news is great news and a relapse in the Japanese economy simply means more QE is coming from the BOJ despite the numerous articles here, and elsewhere, explaining why this very well may not be the case. Furthermore, as we noted last night, comments by the chairman of the GPIF panel Takatoshi Ito that the largest Japanese bond pension fund should cut its bond holdings to 40% were used as further "support" to weaken the Yen, and what was completely ignored was the rebuttal by the very head of the GPIF who told the FT that demands were unfair on an institution that has been functionally independent from government since 2006. The FSA “should be doing what they are supposed to be doing, without asking too much from us,” he said, adding that the calls for trillions of yen of bond sales from panel chairman Takatoshi Ito showed he "lacks understanding of the practical issues of this portfolio.” What he understands, however, is that in the failing Japanese mega ponzi scheme, every lie to prop up support in its fading stock market is now critical as all it would take for the second reign of Abe to end is another 10% drop in the Nikkei 225.
China is now the second largest economy in the world and for the last 30 years China's economy has been growing at an astonishing rate, wowing the world, as spending and investment has been undertaken on a scale never seen before in human history - 30 new airports, 26,000 miles of motorways and a new skyscraper every five days have been built in China in the last five years. But as we (and Michael Pettis, George Soros, and Jim Chanos - among many others) have warned, it is all eerily reminiscent of what happened in the West... the vast majority of it has been built on credit. This has now left the Chinese economy with huge debts and questions over whether much of the money can ever be paid back (spoiler alert: it can't and it won't).