Chinese Stocks Tumble On Contagion Concerns From First Shadow-Banking Default

Tyler Durden's picture

While manufacturing and services PMIs disappointed, the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC's liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of "troubled shadow banking products" had assumed that 'someone' would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the "Credit Equals Gold #1 Collective Trust Product", due to mature Jan 31st with $492 million outstanding. The anxiety from contagion concerns of the first shadow-banking default has pushed the Shanghai Composite back near 2,000 for the first time since July - and to its narrowest spread to the S&P 500 in almost 8 years.

The Shanghai Composite is tumbling... to six month lows (and back near 2,000 for the firs time since July)...


and its closest (nominally) to the S&P 500 in almost 8 years...


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... for example... Zhenfu Energy...

As Reuters reports,

Industrial and Commercial Bank of China, the world's largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.


ICBC's shares have fallen this week amid speculation that the bank would be forced to help repay investors in a 3 billion yuan ($496.20 million) high-yield investment product issued by China Credit Trust Co Ltd but marketed through ICBC branches. The product is due to mature on Jan. 31.


"Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility (for the trust product)," an ICBC spokesman told Reuters by phone on Tuesday.


The trust product, called "2010 China Credit / Credit Equals Gold #1 Collective Trust Product", used the funds it raised from wealthy investors in 2010 to make a loan to unlisted coal company Shanxi Zhenfu Energy Group Ltd.


But in May 2012, Zhenfu Energy's vice chairman, Wang Ping Yan, was arrested for accepting deposits without a banking licence.

Which Barclays warns:

In our view, despite the trust issuer, distributor bank and local government perhaps trying to bail out the mining company, the regulators and central government could probably allow the trust product default to happen as:

  1. government appears fairly determined to reform the financial system and cut off the implicit guarantee of financial institutions;
  2. the State Council is reportedly streamlining regulation of shadow banking including trust business; and
  3. the default of trust products could have less social impact than the default of WMPs, bonds and other products sold to the general public or have problematic practices, such as asset-pool investments.

In our view, the default of trust products could trigger some short-term negative impacts on China’s financial sector and the reputation of financial institutions. However, we believe it is positive for the healthy development of financial system in the long run because the default could do the following:

  1. Be a step to reduce the implicit guarantee of financial institutions for investment products. Banks could shift their financial liabilities back to the investors.
  2. Increase the risk awareness of both investors and financial institutions, which could correct the pricing of investment products to more risk-oriented.

Its conclusion is dire: "If the trust product goes into default, we believe it would be the first default to test the financial system."

Here is the product...

And the growth of such products has been enormous as we have explained in great detail previously: at RMB10.1 trillion as of Q3 should the first domino fall, watch out below.

Finally for those who have forgotten, below is a quick schematic of what a WMP looks like:

As Michael Pettis, Jim Chanos, Zero Hedge (numerous times), and now George Soros have explained. Simply put -

"There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years."

The "eerie resemblances" - as Soros previously noted - to the US in 2008 have profound consequences for China and the world - nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
knukles's picture


It's the weather

Buy moar!
It's just the fear of silly shit like tapered poops and shadow people making 'em nervous
Buy moar!
Dick Whazzo from Numbnuts Bank, HK says the Buy moar!
Buy moar!
Little Becky of the Orthodontia (Anybody but me notice she got her teeth fixed a short while after I started ragging her, right here in River City?) says it's just Conspiracy Theorists on that Tyler Durden site that don't know what they're talking about!
Buy moar!
Change the start date on the chart and it'll look fucking awesome!
Buy moar!
I'm getting myself talked into it!
Buy moar!
Just plain fucking Buy moar!

flacon's picture

So... you are saying we should buy shares of SPY then? /sarc

Ness.'s picture

/sarc not necessary at this stage.



Obchelli's picture

And S&P and nasdaq futures are up after INTC miss... Kind of shows market will never ever drop

Four chan's picture

im long h1n1 thanks china.

TruthInSunshine's picture

China & Japan are in a race & it will be interesting to see whose economy breaks first...or breaks more deeply sooner, with the manifestations of such breakage so pronounced that the media and government officials can no longer plausibly deny them.

Squid-puppets a-go-go's picture

if this drop of Ice9 in the financial ocean does the trick, the freeze will spread far beyong the seas between china and japan

Fish Gone Bad's picture

Here is how it is resolved:  The Fed gives them a buttload of money.

Can't happen?  shhhhheeesh!  Now how would anyone know?  As long as they can play hide the broken condom, they will.  Eventually someone finds out though...


Google: cafepress cursing fish

Popo's picture

China isn't nearly as fucked as Britain.

(This is a new doc that just came out:   "The End of Britain")

Obchelli's picture

Aaaand S&P levitated 7 more points on INTC miss unthinkable if this was a real market

kralizec's picture

Risk recycling...hardly a new idea...anybody see how the US housing market gets played by the banks?

Buck Johnson's picture

Your spot on, spot on.  It is a race to see which will break soon.  When it does break the other will follow along with the rest of the world.

qmhedging's picture

chicken game,the Gov won't let default happen

TheRideNeverEnds's picture

Exactly, and now in the pre-market the usual suspects are set to gap up several percent on the open as the broad market gaps open to all time higher new new new highs. 


There is point where this becomes ridiculous and we have clearly passed it.... 

SMG's picture

One of these days something will make this obscene fantasy most people are living come back to reality.  Maybe this is it, maybe not.

It could have happened in 1987, 2000, 2007 etc..., but it still hasen't happened yet.

I wonder when............

FreedomGuy's picture

"He who exits first, exits best".

Yen Cross's picture

    Since we're on the topic of Asia, these numbers don't bode well for Abenomics .



International Transactions in Securities data from Japan’s Ministry of Finance, for the week ended January 10

  • Japan Buying Foreign Bonds Y -740.6bn (previous week was Y -448.2B)
  • Japan Buying Foreign Stocks Y 157.3bn (previous week was Y -9.4B)
  • Foreign Buying Japan Bonds Y -743.3bn (previous week was  Y -225.4B)
  • Foreign Buying Japan Stocks Y -219.1bn (previous week was  Y 68.2B)
Jim in MN's picture

What do you think of the latest Koizumi attack?

According to sources, Koizumi, a former LDP president, was the one who brought another former prime minister, Morihiro Hosokawa, out of retirement based on their shared view that Japan should become a nuclear-free country.

“You should run in the Tokyo gubernatorial election,” Koizumi told Hosokawa in late December.

On Jan. 14, Hosokawa, with Koizumi at his side, announced his candidacy for the Feb. 9 Tokyo gubernatorial election. Both retired politicians vowed to challenge Abe’s policies of promoting the restart of idled nuclear reactors and exports of nuclear power technologies.

Septicus Maximus's picture

The "oyabun" (Mori) thinks Koizumi's gambit was dirty and low.  You can bet he'll be calling in a lot of favors to use against Hosokawa, should it come to that.  

I think more pressing is the SDF's readiness to fight off the Chinese.  If China's economy tanks, as the above piece suggests is nearly a cerntainty, you can be sure the chicoms make a stab at the islands, either the Philippines' or Japan's.  Or both.  Then shit gets interesting. 

Offthebeach's picture

Better would be China fighting off alien UFO invasion of the Gobi desert. Pull off the streets 20 million unemployed utes, march them around for a few years. Build and crash 10,000 fighters, bombers. Fire off arty shells into hillsides until barrels melt.
Think Krugman browken window theory ( KBWT )

So Close's picture

When China sneezes the US catches a cold?

NoDebt's picture

Doesn't matter who sneezes any more.  It could be China, Japan, Europe, the US.... every globally-interconnected bank dies shortly after the first sniffle.

FreedomGuy's picture

Government will fix all of matter that they cause it.

Let's start a pool before the next round of government manipulation and fixes. When will we first hear the word "Quadrillion" whether in dollars or conversion?


knukles's picture

No, that's GM

Oh, they moved most of their HQ to China... duh....
Fucking win win bailout!

What the fuck are these people in DC doing?

forwardho's picture

When the derivative markets sneeze... everyones head will explode.

Jack Burton's picture

The key phrase "Those on the other side of the high interest shadow banking loans were convinced someone would step in to bail them out of things went bad." Not word for word, but close enough. Much of what passes for finance and markets in America functions off of the same priciple, everyone is convinced that someone [the fed] will step in and bail out their deals and financial engineering products if things go south. At least in China, in this one case, we shall see what happens when the bailout doesn't materialize!  Bailouts, this is the assumption behind shadow banking and behind American financial engineers, and the big banks. ALL are operating under the implied bailout guarnatee. IF that guarnatee were taken out of the system, markets would go into crisis, and then implode like a super nova. Rigged markets are fun and profitable for our elites.

I hope this is the first of many decissions in China NOT to step in and make good everyone's loses. All these financial geniuses aren't worth shit IF they lose government guaranteed bailout protection. Without that cloak to hide behind, they are just fraudsters like we know they are!

Offthebeach's picture

Im not needing a bailout. I have Social Security/cop/fire/teacher pension/ section 8 disability......etc.

NoDebt's picture

Amazing that it has to come out of China, pointing out there are positives to a default on an obviously stupid investment:

default of trust products could trigger some short-term negative impacts on China’s financial sector and the reputation of financial institutions.However, we believe it is positive for the healthy development of financial system in the long run because the default could do the following:

  1. Be a step to reduce the implicit guarantee of financial institutions for investment products. Banks could shift their financial liabilities back to the investors.
  2. Increase the risk awareness of both investors and financial institutions, which could correct the pricing of investment products to more risk-oriented.

This is a COMMUNIST country saying this, boys and girls.  Here in the US.... nope, any default is the end of the earth.

Jim in MN's picture

They're just trying to make us look bad. 

Son of Loki's picture

"They're just jealous of our freedom."

Fish Gone Bad's picture

Its not like the Chinese don't eat cats.  They also eat teacup poodles and malamutes.  Honestly, a malamute?  Now that is seriously just wrong...

Offthebeach's picture

Make Amerikan loose face, embarrassing LBJ, FDR ancestors!

satoshi101's picture

Communism doesn't have anything to do with it, ... as the USA is far more COMMUNIST in fact.


Apples and Oranges,

In ASIA a DEBT MUST be repaid, if you don't pay it, then they go after the FAMILY.

In CHINA most of the real-estate speculation was on government flats, the government has been financing itself with sales of condo's forever,...

People were borrowing from shadow sources at astronomic rates to ride the real-estate boom,

So fucking what MORONS were flipping houses in ASPEN and making %100 in a week for years in 2004-2007, then one day it was over, ... and they walked, ... ran away,...

Too many people doubled-their bets, when they should have walked away from the table after the first few good wins.


The USA took care of the real-estate collapse by PRINT FIAT to the moon, to rise the housing bubble back off the ground.

Will CHINA do any differently?


The difference is the chinese government can afford to keep it all empty for-ever waiting for the price to go back up.

In the west a rotting track-home has a 5 year life in the elmements, in CHINA a 10by10meter FLAT ( concrete room ) has an infinite life, thus IHMO no fucking comparison,

IN time all these prison cells in all these buildings will be filled,


Sure glad I live in remote village and not these URBAN fucking citys, but then they're no different than USA, its just that chinese city's don't have the crime and poverty.
They're all fucking UGLY.

buzzsaw99's picture

a chinese made building with an infinite life, that's a good one!


another thing, the chinese gubbermint does not care about losing money on real estate as they can print as much as they want for free. they are worried that the peons will riot if the inflation rate goes too high for rice and noodles.

knukles's picture

Who cares?
It's over there in China and we're isolated from them.
Buy moar!
They're a old behind the times uneducated unindustrialized nation of Yak farmers and camel hearders
Buy moar!
Chinese porn is lousy!
Buy moar!
Just Buy Moar!

ManWithaPlan's picture

Heck all porn is lousy compared to American porn! It is one of our last great industries along with war and drugs...

knukles's picture

Imagine how much better it'd get if they declared a "War on Porn"!

fxrxexexdxoxmx's picture

Chinese porn is really bad. And I search Asian porn all the time. The Japanse sites are really weird and somethings you should never actually see.

knukles's picture

Like what?
Comeon comeon comeon
Tellme tellme tellme
Whatdaydo whatdaydo whatdaydo

darteaus's picture

If the no bailout rule holds, it won't be long before: IT'S A STAMPEDE!!

jim249's picture

The fed will step in and buy all the bad debt and add it to their collection.

FreedomGuy's picture

Exactly! I am betting we will hear the word "Quadrillion" in the not too distant future.