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China Trust "Bailout" To "Unidentified Buyer" Distorts Market As "Risks Are Snowballing"
In a 2-line statement, offering very few details, ICBC's China Credit Trust Co. said it reached an agreement to restructure the CEG#1 that ha sbeen at the heart of the default concerns in recent weeks. The agreement includes a potential investment in the 3 billion-yuan ($496 million) product but didn’t identify the source of funds, or confirm whether investors would get all of their money back. The media is very excited about this entirely provisional statement and we note, as Bloomberg reports, investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal which will involve the sale of investors' rights in the trust at face value (though no mention of accrued interest). As BofAML notes, however, "the underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time," and while this 'scare' may have raised investors' angst, S&P warns "a bailout of the trust product [leaves] Chinese authorities with a growing problem of moral hazard," and they have missed an opportunity for "instilling market discipline."
1) ICBC issues a 2 line statement on a CEG#1 restructuring - no details and no comments from anyone involved
China Credit Trust Co. said it reached an agreement to restructure a high-yield product that sparked concern over the health of the nation’s $1.67 trillion trust industry...
Beijing-based China Credit Trust’s two-line statement on its website didn’t identify the source of funds, or say whether investors would get all of their money back.
2) Investors claim they "could" be able to sell their rights to the CEG#1 trust to an "unidentified buyer" at par (though receive no accrued interest as far as is clear)
Industrial and Commercial Bank of China Ltd. told investors of a China Credit Trust product facing possible default about an offer in which they can receive back their full principal, according to an investor with direct knowledge of the offer.
Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen.
China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
3) “A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,”
As one analyst noted, the PBOC is running scared...
“It indicates the government still won’t tolerate any ultimate default and retail investors will continue to be compensated in similar cases.”
4) This confirms S&P's recent warning that "A bailout of the trust product would leave Chinese authorities with a growing problem of moral hazard," and an opportunity for “instilling market discipline” will have been missed.
...said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
5) of course, China may have shown its moral hazard hand on this occasion but as BofAML warns, "We suspect that, at a certain point, the involved parties will be either unwilling or unable to bail them out [again], which may trigger a credit crunch...The underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time."
There are plenty more trust products facing maturity/default in the short-term...
The most volatile part of the system is the financial market and the weakest link of the financial market is shadow banking. Within the shadow banking sector, we believe that the trust market faces the biggest default risk because credit quality here is among the lowest. The stability of the shadow banking sector is based on public confidence and any meaningful default will chip away some of the confidence. We suspect that trust defaults by private borrowers may work on public sentiment gradually while any LGFV trust default may immediately trigger significant market volatility. 2Q & 3Q this year will be another peak trust maturing period.
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Carry out
or delivery?
China's Bear Sterns. Wait until the equivalent Lehman Bros comes. Watch out!!
It's worse than that, I think.
Lehman and Bear Sterns had actual assets. I'm not sure the collateral in many of these 'Trusts' is worth anything at all. China has grown too quickly, on a mountain of cheap debt, and it's been loaned against cardboard assets.
If China slides, we're all fucked too - thanks bankers!!
China will be fine. They have over 3 trillion USD in reserve. While the dollars are rotting in their hands, they are using them to buy gold, (real money) hand over fist.
Moral hazard?
I'm pretty sure morals and ethics in government are dead, along with the rule-of-law and the Geneva Convention.
Moral hazard will corzinue until the beatings improve.
Exactly, the corrupt fascists in charge, simply do not care who knows it anymore and are going to bailout whoever they like. Amazing. This will be an interesting year to be sure.
"Sugar-tits! Get my broker on the phone ASAP. The world economy was fixed today and I'm ready to pile all my assets into stocks."
Looks like there is now $3 Billion Yuan on the Fed's balance sheet? Just monetize all debt around the globe and let's start over.
It's too late to instill market discipline. That bridge has been burned long ago.
Maybe there is still time to at least install a market? ;-)
Incompatible systems. Not possible, even if they wanted to (which they don't).
A market can not be installed from the top down. It is something that must be allowed to form from the bottom up with as few controls as possible.
Lol ... you're old.
Indeed. Why should the Chinese confront moral hazard, when the anglo-saxon market leaders have built their whole economy on the concept?
It's all fun and games until somebody doesn't get a bail-out. Which, fortunately, isn't going to happen for a long, long, long, LONG time.
Buy anything. Buy everything. It's all guaranteed. Crisis: averted (deferred). Again.
the whole global eCONoME is founded upon the bedrock of moral hazard and kleptocracy writ large
Judge Smalls default avoidance strategy Chinese style to investors. You'll get nothing and like it while the Chinese Army has a gun pointed to their head as the investor signs the papers making it legal.
They had no choice at this point after getting caught with their pants down trying to issue capital controls to keep the money stampede from happening over a default and in typical you know they planned to do just this is blame the messenger and call it a hoax routine. They got boxed into this corner and need to save face because the first time China issues capital controls and gets caught doing it is going to cause serious mistrust with parking money in the Chinese banking system. from there on in, collapse or not. Capital controls are not a sign of a healthy banking industry period and when the largest credit creating central bank in the world does it is not a good sign.....
" it is going to cause serious mistrust with parking money in the Chinese banking system. "
LOL, no one park money in the Chinese banking system. The Chinese banking system is a system whereby corrupted officials TAKE money OUT from the bank. THat is the sole function of the Chinese Banking system.
Once money in hand, the said official send his spouse , kids and money out of hte country. A preferred way is to buy an African residence , then apply as an African for residence in Hong Kong, then ship the money to Hong Kong and stay in Hong Kong for 7 years and become a legal residence. There are a lot of them here in Hong Kong, you can tell who they are without trying . They do not stand in line like others. They are pushy. Their fucking kids agressive. I wish it is not true but these fucking kids all seem to born like that.
It is a CONfidence issue, they are the biggest Central Bank, they have problems and need to issue capital controls to minimize damage for what should be a small in size default in relation to the overall system, you can figure out the implications that means for the bigger picture and cascade effect into other systems.
That "Unidentified buyer" is gonna get real busy soon buying loads of crap. What a great investment.
So how much money has the US Federal Reserve commited?
Seems like the US Fed thinks they can bail out the world.
Nobody knows how much money was sent to Europe.
The Fed has so many off-balance sheet dealings nobody can know.
The US Fed's fantasy accounting. Chinese Banks and institutions need to take advantage of the bailout and ask for trillions. Rinse and repeat when you have a sugar daddy.
S&P warns that suspect mortgage loans to seemingly unqualified home buyers will destabilize the entire economy, and create a moral hazard. Lenders will have missed an opportunity for instilling market discipline.
Oh, wait.......what?
Waow, we should believe the economy is booming and everything is fine in China. But the economy and banking system cannot deal with a $500 million default ?????
I can't even imagine how much rot lies behind the curtains for this to happen...
So whatz?
It's like for them their first Crysler bailout, not even a Continental Illinois.
They got decades and trillions to go.
FORWARD CHINESE CITIZEMS!
Why should banks or anyone else be responsible. Run the institutions into the ground and over-leverage, then ask for the Federal Reserve to bail you out. Rinse and repeat until the system collapses.
There is no sense of fiscal responsibility. The ones that are fiscally responsible get punished by the Federal Reserve.
I don't know. The vehicle's name "Credit Equals Gold" is really symbolic for our time. But if someone offered me to buy into a product with that name I would run away screaming loud - even if I knew nothing about it.
Looks like they took a page out of uncle Ben's manual.....
Remember, they do it for you.....the little guy. They don't want you to get hurt.
the only thing "market discipline" can do now is be printed on t-shirts and sold in a joke store
In china every thing smooth over and taste better with sugary sweety orange chicken glaze. Government issue, fix ALL problems. Put on everything.
http://dhnnews.com/the-469-mln-bailout-of-this-investment-product-risks-...
Finally gaining traction after zh has been reporting on this forever
Confucius says:
When trust of 500 million give big headache, see doctor for finding the real cause of problem as symptom is only small as pimpel on Buddha's ass. What you don't see or hear (yet) is much bigger elephant on Buddha's head.
Free parking.
Like I said previously. China is not an African country that owes money in a foriegn currency it can't create. Expect there to be a lot more typing in of money.....Too bad about the cost of living though, but then that only affects the plebs.
central-control epic-win! If by epic-win we mean GONE FULL RETARD.
Is Turd still calling the USD the POS? I guess we are going to have to start refering to the USD as POS1 and the CNY as POS2. Chinese investors must love their government holding UST.