China Narrowly Averts Credit Bubble Pop With Latest Government Bailout Of First Domestic Bond Default

Tyler Durden's picture

When conventional wisdom worries turn to China, the prevalent consensus is that the biggest threat to the country is a housing/real estate bubble. And certainly, China has a massive housing and overbuilding bubble as can be seen on the chart below, presented previously, showing the "concrete scowl" or the cement consumption per capita vs GDP per capita. The only other country which is in dire a housing bubble situation as China is Saudi Arabia.

Of course, having a housing bubble does not mean China is immune from that other traditional corollary to excess spending: a credit bubble. In fact the two virtually always go hand in hand (see US 2003-2007). However, due to economic reporting standards out of China that are, how should we say this, lax, when it comes to getting a clear picture of state finances nobody really has any clue. As a result, due to sovereign debt being an arbitrary, and naturally low, number, few if any are concerned about the grievous credit bubble in the land of the dragon (although GMO's Ed Chancellor and Mike Monnelly have a few very critical things to say about it - more on that later).

Yet one place where not even China can hide what is now a clear credit bubble is in its soaring corporate debt. As we showed in November, China's Corporate debt as a % of GDP is now the highest in the world and closing in on 200%.

So what is any credit-funded empire which needs growth at all costs, irrelevant of how much bad debt is accumulated in the process, supposed to do? Why stick its head in the sand and deny everything of course. Just like the US did until it couldn't do it any longer.

Sure enough, what may come as a surprise to some, is that despite having trillions in corporate loans, China has had precisely zero corporate defaults to date. That's right: zero.

How is that possible?

Simple: just like the US Fed and global central banks are doing everything to mask the fact that the entire financial system is insolvent, that absent tens of trillions in new money created out of thin air (and collateralized by ever crappier assets) and used by dealer banks to buy up risk assets, there is no incremental demand for goods and service as the entire loan-deposit based fractional reserve banking system has imploded and has not even recovered the loan levels last seen in 2008, so China is proceeding with bail out after bail out of any company that threatens to expose the reality that Chinese corporations are massively undercapitalized, and that absent Chinese state support this particular 180% debt/GDP bubble would pop immediately and have dire consequences around the world.

In fact, for the just most recent example of what really goes on in China vis-a-vis said bubble, go no further than today's Reuters which tells us that "China's first bond default averted again after local govt steps in" as the government's "zero-tolerance" policy for default continues. In it we read:

A Chinese solar firm which nearly produced the country's first domestic bond default will complete an interest payment on schedule after a local government intervened on its behalf.


Investors say the latest instance of a government riding to the rescue of a troubled Chinese firm has led to moral hazard and inefficient credit allocation.


The government of Shanghai's Fengxian district persuaded Shanghai Chaori Solar Energy Science and Technology Co.'s banks to defer claims for overdue loans worth 380 million yuan ($61 million), the company's chairman, Ni Kailu, told creditors at a meeting on Wednesday.


In previous near-defaults, local governments had stepped in directly to arrange bailout funding. But as in past cases, the deal flouts legal notions of debt seniority by allowing one group of creditors - bondholders - to get paid in full, even as a pre-existing default remains un-cured.

The implications of sticking one's head in the sand by now are clear to everyone:

Analysts say the market does not effectively price in risk because investors assume the government will never allow a default.

Funny: that sounds vaguely familiar about what investors say about the Fed in broader terms...

This assumption appears well-founded. In April 2012, a local government in Shandong province stepped in to prevent a bond default by a state-owned textile company, Shandong Helon .


In July, a local government in Jiangxi province announced it would use taxpayer funds to repay the trust loans of LDK Solar , a U.S.-listed solar equipment manufacturer.

Sure enough, there are those who lament the fact that instead of tackling what is a huge and rising problem, China has once again instead decided to throw good money after bad:

Many market watchers had believed that the government would allow Chaori Solar to serve as a long-awaited lesson in credit risk and a test of the country's little-used bankruptcy laws.


Unlike Helon, Chaori was not state-owned, nor was it a leader in its sector. Its location in prosperous Shanghai also meant that it was not viewed as integral to the local economy.


"It seemed like it could be a perfect test case for the first default," said a Chinese bond trader at a European bank in Shanghai.

It did... But the government decided not to do it. Why? GMO's Ed Chancellor has a chart that explains why not.

In other words, the time is nigh for the Chinese bond bubble to pop, and every government bailout will merely incentivize many more companies to "near default" only to be rescued by the government, until such time as the government can no longer sustain the entire corporate bond bubble nearly two times greater than the entire economy.

It gets worse: if and when the corporate bubble pops it would immediately unravel all the other underwater forms of debt in the country, among them sovereign, financial (SOE and otherwise), corporate, municipal, and of course household. For a sense of just how big all of this combined is we go to GMO and an extract from a report we will post shortly:

Loans are being taken off the banks’ balance sheets and placed in shadow banking products. By law, these credit instruments are non-recourse. But skeptics suspect that the banks will be forced to compensate customers for any future losses. Bank loans are officially around 130% of GDP; add on interbank assets, other assets held on balance sheet, and various off-balance-sheet exposures, and the banks’ total credit exposure is close to 300% of GDP.

Add tot his 180% in corporate debt, and you get....

A very, very big number. And a number that is massively impaired, but which courtesy of daily government interventions to mask a very dire reality, will not see the light of day until there is no choice, and the whole house of Chinese broke and insolvent cards comes crashing down.

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LawsofPhysics's picture

But but but I thought China was a net creditor that was going to save the world? < sarc off >  Well, they will save the world, for anyone who is chinese.  round eye, not so much.  Go ahead, let the yaun appreciate, please.

Say What Again's picture


There is NOTHING - absolutely NOTHING - that can cause this "market" to sell off

LawsofPhysics's picture

Indeed.  China will become the next America, not necessarily a good thing.  Might need to increase my yuan holdings.  Go ahead, let the currency rise, I dare you.  It will make my next trip to China even more affordable.

Dr. Engali's picture

Yes there is...I can leverage up and go all in. Better yet I can leverage up and buy TNA (small cap bull 3X)

GetZeeGold's picture



If China can't get solar to work....I suggest we declare it DOA.

joego1's picture

It works great for me. Unfortunately it doesn't work so good as a biz due to croney capitalism.

prains's picture

If China can't get solar to work...


if china can't get soylent green to work they are DOA

LFMayor's picture

Oh, they'll get it to work! Instinct is a wonderful thing and so powerful that it takes much conditioning and training to overcome it consciously.  Strip away those "human" layers of consiousness and the animal still remains.

Wendigo walks in the cold woods.   If the Cree and Chippewah were afraid of it, you can damn well bet your ass it was worthy of fear.

Son of Loki's picture

' It take many nails to build crib but one screw to fill it.'


Old Confucious saying

masterdjm's picture

Thanks as always for a great piece on the true economic state of affairs of the world in which we live in!!



Catullus's picture

Looking up "Keynesians and political hacks who think China is the next big thing". Nothing like a credit bubble implosion to discredit a Keynesian.

Catullus's picture

The first. But the blame is on "unregulated 'shadow' banking". Aka fractional reserve banking. And what's great is that exactly the same thing happened in the US, and he clearly identifies this, but blames the unregulated nature that causes it. The credit bubble even when recognized is somehow never blamed on the monetary system.

Also, just to knock krugman even more, the bubble was not bursting in 2011 or 2012. And may not in 2013 either. Only because he loves to knock austrians for not accurately predicting inflation.

Catullus's picture

Of course, krugman is beguiled by his own terrible capital theory.

What I wonder here is how Roach — or anyone thinks that increased savings would help right now. What would cause an attempt to increase savings to be translated into increased investment, or an improved trade balance, as opposed to simply a more depressed economy. Yes, I know that macroeconomics at the zero lower bound is different from the normal scene — but how can an economist as good as Steve Roach not get that after more or less two years in a liquidity trap?

You see had china not inflated and saved money, they would have crashed their economy.. And thus the insanity of these credit bubbles. You can't but not inflate them. They only seem to be "harmful" when done by "unregulated" banking as opposed to the government. And by "mature" governments at that.

Rainman's picture

Chinese commie kleptocrats are cashing out and moving offshore to buy second homes in Commiefornia. They will forever feel right at home there.

Dr. Engali's picture

It is nice to see that governments world wide are eliminating any risk those properly connected that is.

buzzsaw99's picture

moral hazard is nice euphemism for sticking it to taxpayers in their naughty places.

drivenZ's picture

China can keep the economy propped for a long time. The bubble is not even close to popping. 

LawsofPhysics's picture

Of course they can because they are a communist one party state. They can make the numbers whatever they want.  if you disagree or discredit, you disappear.  Thanks for that great insight.

drivenZ's picture

you don't need a one party system to keep the economy propped. see: USA

LawsofPhysics's picture

We only have one party in the U.S.A.!!  What planet are you on?

drivenZ's picture

we have two parties(or more), they are democratically elected. If people are too stupid to figure out theyre electing the same idiots over and over again then that's their own fault. 

LawsofPhysics's picture

You are an idiot.  The funding for candidates from both parties comes from the same source.  Hence, the interests of only those corporations/banks are being served.  forward soviet!  That's a good sheep.  If we still had a representative republic then the delegates for Dr. Ron Paul should have had their voices heard at the GOP convention.  Instead, they were ejected from the convention. The tyranny and fascism is now full frontal, yet sheep like you ignore such events saying "my vote still counts".  Morons.

Super Broccoli's picture

when are we finaly going to get out of the WTO ????? you can't do business with cheating monkeys !

shovelhead's picture

Bullish for US Ponzi exports.

youngman's picture

Just another bailout....this one hit the news for some reason...probably because its a Green there anyone in the world not printing fiat at a record pace.....?????

Again it amazes me that Gold and Silver are not at "5 year highs" the stock heard on CNBC every five minutes.....the PM´s should be at 100 year all I can see around me are failing banks...countries...politicians...and increrasing expenses......I guess i should go grow a ponytail and talk with a Swedish accent or something

adr's picture

It is really getting insane in California. There are towns outside LA that are now 90% Chinese, growing big time. The only places new construction is going on, and existing property values are skyrocketing as the first Chinese buyers sell to new Chinese buyers.

Then you have the Chinese buying up half of downtown Toledo, OH and I hear a lot of Detroit. A chinese firm just bought a large hotel in Cleveland.

I think the Chinese see America going communist and want to get in on the ownership of the population so they are ready to profit off the misery. Remember communist leaders lived better than the kings of old. Iowa still makes really hot farm girls, perfect to fill the brothels of Comrade Kim.

Rainman's picture

Rankings of CA residential real estate foreign sales last year: 1- China 2- Canada 3-Mexico

krispkritter's picture

Similar to what Japan was doing in CA in the late 80's and early 90's.  Then their bubble burst along with the RE market. 

History repeating or imminent 'invasion' ?

LFMayor's picture

Exactly!  They'll get their asses peeled just like the Japs did.  And in the advent it goes full out tits up in the water, what the hell good will a piece of paper saying you own a parcel of land an ocean away really do for you?  The Humongous will thank you for a nice sheet of clean paper to wipe his ass with. Right before he straps you to the pushbars on the front of his hoopty.

LawsofPhysics's picture

As many have stated before.  The Chinese and American "elite" have been on the same page for a very long time.  The plan is to make sure that the entire world works for chinese wages, starting with Americans.  Both of my brother-in-laws are in venture capital.  All of my neices and nephews speak, read, and write mandarin.  They are being groomed to take over daddy's assets and businesses and have been prepared for this from day one.  I now have an American on my staff that reads, writes, and speaks mandarin.  He has been with us since high school.  I trust him and he is an essential part of negotiating with these merchantilist fucks.

All that paper that we flooded the world with, is indeed coming back to the U.S., you just need to know where to look.

Snoopy the Economist's picture

I would rather have chinese neighbors than illegals anyday.

JR's picture

“Almost from the time when the US Immigration Act of 1965 abolished the ‘national origins’ standard for immigration into the United States, a small band of Marxists and left-leaning radicals was working to exploit the new law and the new masses of immigrants that soon began to arrive in its wake as political weapons against the United States.” – Samuel Francis, 1994

“Today the movement is toward separatism, with the goal of increasing awareness in a small but united Chicano community that is inner-directed instead of being directed from without.  The Chicano people seek self-determination in what were formerly and rightfully their lands, not those of ‘Anglo-America.’” – Mexican and Latin American immigration activist working for the disintegration of the United States as a unified nation-state, Introduction, Importing Revolution (1994).

It’s demographic warfare:

December 2012 -- America has reached a landmark point as, for the first time in its modern history, most of the babies being born there are non-white.

Number of babies born to ethnic minorities surpasses whites in U.S. for first time
  • 2011 census data shows 50.4 per cent of births were from ethnic minorities
  • Caps decades of immigration growth that is now slowing
  • All births down in economic slump, but drop faster for whites
  • Minority population continues to rise to 114.1million - 36.6 per cent of total
  • Supreme Court considers ruling on state's strict immigration law

Son of Loki's picture

<< tens of trillions in new money created out of thin air >>


....then smuggled out in cash in suitcases to HK and Vancouver RE while the 'regulators' look the other way.

Dan Conway's picture

They are probably buying here in advance of the pitchfork brigades. 

q99x2's picture

Print more Won Ton soup.

MFLTucson's picture

Let’s see if I understand this.  We have been printing trillions since 2008, we have a 16.5 Trillion dollar deficit, we have 7 million homes on the banks books in off balance sheet accounts that were reposed, we have a negative GDP, we have a government incapable of paying its bills and we are discussing China which is a country with 3.2 Trillion in excess currency reserves?  Anyone see anything wrong with this picture?

zdk45's picture

would just like to add...btfd

LawsofPhysics's picture

Using the same monetary policies and accounting practices that the Chinese have been, our books, as well as that of many countries would look very different.  Like china we should have nationalized everything long ago.

The chinese have simply out-frauded all the other fraudsters.  And yes, those reserves are already coming back to many countries, including the U.S.

Dan Conway's picture

China has outfrauded the fraudsters?  They are pikers compared to our wall streeters and crony capitalists.  The chinese politboro has successfully used its human resources for profit (slavery) making crap for walmart and apple.  But like all greedy people the chinese elites are flaunting their wealth and there is an uprising in the making.  The leaders will try and flee but not all will make it.  Our wall street elitists get to flaunt their wealth, openly increase their political control in the west (US, Europe, Canada), use the savings and resources of western citizens to enhance their own wealth and power, and they will still find plenty of corrupt and backward countries (china, brazil, thailand, etc.) to exploit.  We send trillions of worthless dollars to china and their banking industry is insolvent and no real ability to collect on those worthless dollars.  Like the japanese years ago, the chinese are allowed to buy overvalued property in the usa but that is basically it.  Fraudsters?  Our media is more worried about lip synching and gun control for the non-elites. 

MFLTucson's picture


Let’s see if I understand this and we are all on the same page.  We have been printing trillions since 2008, we have a 16.5 Trillion dollar deficit, we have 7 million repossessed homes on the banks books in off balance sheet accounts, we have a negative GDP, we have a government incapable of paying its bills and we are discussing China which is a country with 3.2 Trillion in excess currency reserves with a 7.5% growth rate? And the headlines today are that the US “recovery” (lol) is picking up steam while the Chinese just dodged a bullet?  Maddening!


world_debt_slave's picture

Those that are ruthless, without morals, out to win at any cost, create and run TBTF knowing that the gov. of most countries will bail them out when in trouble and grease the govs palms when making profits. The way of the world. 

augustus caesar's picture

Reality for the majority of people is simply a collective dream, posited as fact.

For millions of people it was a fact that the Earth was flat.

For millions more it was a fact that Earth was the center of the Universe.

For billions more it is a fact that the Chinese, one of the most deceptive cultures in history, maintain legitimate books.

JR's picture

“ just like the US Fed and global central banks are doing everything to mask the fact that the entire financial system is insolvent…”

China is a communist country operating in conjunction with fascism. The modus operandi is for China to supply the slaves and for the fascists to supply the market and means of production. Hey, World, how’s that working out fer ya?


“Stop.. hey, what’s that sound? Everybody look! what’s going down!”

Dan Conway's picture

What could possibly go wrong in a country where there are no defaults because the government will bail them out?  We should become more like them....... or did they become more like us?