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It Begins... Another High-Yield Chinese Shadow Banking Trust Defaults

Tyler Durden's picture





 

While the eyes of the world were focused on the now infamous "Credit Equals Gold #1" Chinese wealth management product - it's imminent default and last-minute bailout by 'investors' unknown - the coal industry in China continued to collapse (as we noted here). We noted at the time how bailing out current high-yield product investors would merely amplify the problems down the line and it seems that Chinese authorities have heard that message. As Reuters reports, a high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday.

Via Reuters,

A high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday, in the latest sign of financial stress in China's shadow bank sector.

 

...

 

"It matured on Feb. 7, but CCB passed on an announcement from Jilin Trust saying 'We currently can't be certain when (Liansheng) funds will be returned,'" the official Shanghai Securities News quoted an unnamed investor in the trust product as saying.

 

Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds.

 

"Restructuring isn't bankruptcy. As far as we know, there is no problem with the firm's assets. The firm is in negotiations with investors," the paper quoted an unnamed Jilin Trust official as saying.

Backed by China's 2nd largest lender China Construction Bank (note we discussed the largest shadow-bank here), the product is as follows:

The fourth tranche of Jilin Trust's product is name "Songhua River #77 Shanxi Opulent Blessing Project" raised 289 million yuan from investors in February 2012, promising a 9.8% yield - we will see if this technical default results in actual losses for investors.

backed by a coal-industry loan to Shanxi Liansheng Energy Co Ltd...

Shares of China’s biggest listed coal producers have dropped to their lowest valuations on record as falling fuel prices make it harder to repay debt.

 

China’s coal industry is “dead,” said Laban Yu, a Jefferies Group LLC analyst in Hong Kong with an underperform rating on all three stocks. “There are 10,000 producers in China. A lot of them are taking on debt. It gets harder and harder to service debts when coal prices keep falling.

and the risk of more defaults is not going away - in fact will onkly get worse in the next 3 months!!

 

 

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.

 

The bottom-line is that China seems to be testing the reaction of markets to small 'technical' defaults (such as this one)...

Technical defaults caused by repayment delays have occurred before, but market watchers say that China's shadow bank sector is still waiting for a precedent-setting default in which investors are forced to absorb substantial losses.

 

Such an event could shatter the widespread assumption that even high-yielding investments carry an implicit guarantee from state banks. But Jilin Trust is apparently still looking for ways to recover investors' funds.  

The question is - doe s the PBOC really think that desparate borrowers will stop borrowing - and contract the size of the shadow-banking system reining in the out of control credit creation (and its subprime-like consequences)...

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...

However, this just hit the wire...

  • *CHINA BANS BOND TRADE BETWEEN PROPRIETARY, WMP ACCOUNTS

Which sounds ominously like the PBOC won;t allow banks to bail their own WMP investors out and take the risky crap back on their off-balance-sheet books... i.e. The PBOC wants real defaults... not 'technical' defaults

 


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Wed, 02/12/2014 - 23:01 | Link to Comment johngaltfla
johngaltfla's picture

BOOM.

 

But to quote the former Fed Chair the Bernank:

 

"It's contained"

Wed, 02/12/2014 - 23:08 | Link to Comment Soul Glow
Soul Glow's picture

What's contained?  The herpes?

Wed, 02/12/2014 - 23:38 | Link to Comment Gankfest
Gankfest's picture

Incoming Flood Ahead!

Thu, 02/13/2014 - 00:34 | Link to Comment willwork4food
willwork4food's picture

Incoming Global cyber currency ahead.

Thu, 02/13/2014 - 05:27 | Link to Comment The Dunce
The Dunce's picture

The China myth.  Poison dog food.  Contaminated milk.  Moldy disease-ridden dry wall.  Cardboard rice.  Tough to believe that China is the future.  I hope I die first.  Bitches. 

Thu, 02/13/2014 - 10:07 | Link to Comment gmrpeabody
gmrpeabody's picture

But they are way ahead of the rest of the world moving their pigs to market...

Floating bitchez...

Thu, 02/13/2014 - 02:12 | Link to Comment hobopants
hobopants's picture

Not "boom".

The sound would probably approximate someone being fed taco bell (QE) for 5 years, but denied access to the bathroom for that entire time frame suddenly being given the all clear signial.

Thu, 02/13/2014 - 00:51 | Link to Comment Frank -THE COIN -
Frank -THE COIN -'s picture

" Trust Me "

Thu, 02/13/2014 - 01:59 | Link to Comment algol_dog
algol_dog's picture

 Paulson's Bazooka is coming off ice and expedited Fed Ex (Next Morning) as we speak ...

Wed, 02/12/2014 - 23:07 | Link to Comment Soul Glow
Soul Glow's picture

Considering that China is the engine of growth for the world economy, this is very bad news for paper traders.

Wed, 02/12/2014 - 23:29 | Link to Comment NoDebt
NoDebt's picture

No, it isn't.  Sit back and watch what happens over the next couple of weeks.

Just. Sit. And. Watch.

I don't want to give away the ending, but you're going to be amazed.  If you're not, I will give you double your money back (payable in a quasi-guaranteed high yield savings trust certificate).

Thu, 02/13/2014 - 00:47 | Link to Comment nuclearsquid
nuclearsquid's picture

Will upvote you for a hint

 

Thu, 02/13/2014 - 00:50 | Link to Comment theliberalliberal
theliberalliberal's picture

<<<<<next couple of weeks

<<<<<shmext shmupple shmov shmeeks  -  will still be waitng

 

 

 

Wed, 02/12/2014 - 23:11 | Link to Comment NoDebt
NoDebt's picture

If you're gonna threaten default, the best time to do it would be a week after the government bailed-out the previous threatened default on the same type of investment.

Wed, 02/12/2014 - 23:21 | Link to Comment Seer
Seer's picture

NEVER be at the end of the line leading to the Ponzi Party.

Wed, 02/12/2014 - 23:11 | Link to Comment i_call_you_my_base
i_call_you_my_base's picture

"Songhua River #77 Shanxi Opulent Blessing Project"

The name is too good for words.

Wed, 02/12/2014 - 23:11 | Link to Comment The Final Straw
The Final Straw's picture

I'm tired of waiting. Just collapse already. You can only delay the inevitable.

Wed, 02/12/2014 - 23:18 | Link to Comment Soul Glow
Soul Glow's picture

Do what you can, buy silver.

Thu, 02/13/2014 - 00:47 | Link to Comment theliberalliberal
theliberalliberal's picture

i really am starting to think that the whole run up in silver was purely thanks to Max Keiser.

Stops pumping silver and starts pumpting BTC.  Silver drops and BTC takes off.

Silver is getting fuck all out of this gold rally.  Not sure this was a wise move.

 

silver might have more potential to go to da moon but i would sleep better if i was 25% Ag and 75%Au  and not the other way round like i am now  (in dollar terms,  not ounces obviously,  although if 75% of my oz's were Au i would be batting)

 

Edit:  still sleep better than having money currency in the bank

Wed, 02/12/2014 - 23:25 | Link to Comment Seer
Seer's picture

And what will you do for entertainment when it all collapses?

This is "free" entertainment.  Any time I feel that I am "tired" of it I just make sure that I get more stuff done.

Wed, 02/12/2014 - 23:14 | Link to Comment Seasmoke
Seasmoke's picture

So many defaults. So little time.

Wed, 02/12/2014 - 23:25 | Link to Comment Seer
Seer's picture

I'm thinking that we need some structured scoring guide to it all.  Only the highest scores should go to those countries that manage to do spectacular belly-flops...

Wed, 02/12/2014 - 23:23 | Link to Comment QQQBall
QQQBall's picture

Opulent Blessing Project... it would have worked if they would have named it "Opulent Lucky Golden Panda 88888888...."

Wed, 02/12/2014 - 23:32 | Link to Comment NoDebt
NoDebt's picture

Dragon, dude.  Not panda.  Dragon.  It's all about the dragons in China.  Dragon means "seriously, we're not fucking around, you can't lose on this one."

Wed, 02/12/2014 - 23:34 | Link to Comment Seer
Seer's picture

Yeah, a name can make all the difference.  Goldman Sachs still walks the earth while Lehman Brothers no longer does so...

Thu, 02/13/2014 - 00:03 | Link to Comment Mitch Comestein
Mitch Comestein's picture

No losses?  Don't piss down my back and tell me its raining!

Thu, 02/13/2014 - 00:35 | Link to Comment willwork4food
willwork4food's picture

If I'm in a position to piss down your back and tell you it's raining you will believe it's raining and want to buy umbrellas. (Economy stimulated)

Thu, 02/13/2014 - 00:03 | Link to Comment Mitch Comestein
Mitch Comestein's picture

When they first named the offering Black Hole Investment Fund, they had no subscriptions.  So they when with a better marketing company.

Thu, 02/13/2014 - 01:09 | Link to Comment Ban KKiller
Ban KKiller's picture

RIVER OF DEAD PIGS...

Thu, 02/13/2014 - 00:19 | Link to Comment Sizzurp
Sizzurp's picture

These aren't the defaults you're looking for.

Thu, 02/13/2014 - 00:30 | Link to Comment ReactionToClose...
ReactionToClosedMinds's picture

Bernacke is history now ..... calling all Federal Reserve Governors......especially the NY Federal Reserve Bank....what do your masters suggest?

Thu, 02/13/2014 - 00:45 | Link to Comment IridiumRebel
IridiumRebel's picture

Super Happy Dragon Fun Fund!

The Happy Dragon is when a guy ejaculates into someone elses mouth, and then immediately tickles that person so that they snort the cum out their nose when they laugh.

-urban dictionary

Thu, 02/13/2014 - 01:15 | Link to Comment disabledvet
disabledvet's picture

okay...so this isn't complicated. "the State is paying the coal mine to produce. The State dispenses massive favors to their real estate buddies which suddenly become worthless. The State cannot pay the coal company and the mine ceases operations."

Commemnce massive money production and a hyperinflation.

You would get a HUGE panic in buying dollars because a very sudden "fear of starvation" suddenly appears...and there is very little in the way of excess food production right now.

So since you can't buy the grains themselves you proceed to the only alternative...a "food company." in this case that Big Pig Place in Virginia.

12'billion was it?

Thu, 02/13/2014 - 01:31 | Link to Comment Dubaibanker
Dubaibanker's picture
1. China is receiving upwards of USD 110bn FDI inflows each year. 2011 FDI inflow: USD 115.85 bn 2012 FDI inflow: USD 111.72bn 2013 FDI inflows: USD 117.60bn http://online.wsj.com/news/articles/SB1000142405270230441910457932410069... 2. FX reserves at USD 3.8tr http://www.themalaymailonline.com/money/article/china-foreign-exchange-r... 3. Monthly trade surplus at USD 31bn. http://www.bbc.co.uk/news/business-26148707 While China has become the world's largest trade country! http://www.ecns.cn/business/2014/02-13/100631.shtml 4. From 2% in 2010, to 20% in 2013, yuan is very rapidly becoming a trade currency aside from being a high demand investment ucrrency thus causing stability as well as becoming more acceptable to many. http://www.ibtimes.co.uk/chinese-new-year-2014-rmb-internationalisation-... UK Chancellor of the Treasury almost was very enthusisatic about yuan on the floor of ICBC's London office: http://www.youtube.com/watch?v=pA-we6tbCoo Switzerland and UK along with Dubai and HK/Singapore are vying with each other to become the first and at least regionally to become the main centre for settlement and bond issuances in yuan. 5. Reforms always happen gradually, wehther in China or in USA (who barely gave up slavery after hundreds of years just in the 1960's or in Europe which took decades post WW1 and WW2 to 'unite' and create EUR in 1999 which has almost failed just in 2014 (15 short years) and might end as an experiment also very very gradually over the next couple of years. Monetary unity without fiscal unity or without immigration unity or without unity on productivity or without political unity cannot last much long as an experiment. Change and reform has to be gradual else the floodgates could open making a mess, just like in Russia after Gorbachev or Brazil when billions flooded in over the last 10 years and they had curb it after 2010 and even in Dubai when billions came since 2002 after real estate and stock market was opened to foreigners and when it left in 2009 causing a masisve decline. Reforms are the main focus since 2013 in China as mentioned in their plenum last year and will become more so in 2014 and onwards as stated by the Shanghai mayor just yesterday. http://news.xinhuanet.com/english/china/2014-02/11/c_133106276.htm 6. Deutsche bank has created a nice note with all the data and believes that Chinese equities could rise 20% in 2014 among other growth and stabilising factors besides reforms across all the sectors of society. https://www.dbadvisors.com/content/_media/China_Themes_and_Strategy_for_... 7. From Swiss Dr. Marc Faber in 2012 and Scottish entrepreneur Sir Tom Hunter (on Feb 11, 2014) are suggesting to GO EAST, YOUNG MAN! http://www.youtube.com/watch?v=IBsq3W7jajc http://video.cnbc.com/gallery/?video=3000244599 8. With USD 16trillion in debt in USA, if they can save AIG, Fannie Mae and Freddie Mac, Citibank, Merrill Lynch, Goldman Sachs, JP Morgan etc while having Madoff and fighting wars in the Middle East, why cannot China fight a weak banking system (which seems to be its only weakness unlike US or Europe who have multiple negatives from high debt to failing banks to ageing populations to declining productivity to downgraded Govts to frailing infrastructure and lack of spending power etc) with its USD 3.82 tr in POSITIVE reserves and all the other plus economic plus points?   9. Did I mention China is the only country buying gold? http://www.ibtimes.com/chinas-central-bank-may-be-stocking-gold-report-1... While ICBC being the largest bank in the world make USD 44bn per annum http://www.bloomberg.com/news/2013-08-29/icbc-first-half-earnings-increa... And, USA's JP Morgan makes a measly USD 20bn approx per annum! http://www.nasdaq.com/article/jp-morgan-profit-falls-wells-fargo-earning... Let's just look at the trade ports in East versus West. This is a fascinating chart: http://storymaps.esri.com/stories/2013/ports/ When 8 of the world's Top 10 largest ports are situated in China, does China really have to worry? http://www.ship-technology.com/features/feature-the-worlds-10-biggest-po... China and Russia jointly are building the world's largest thermal dam: http://rt.com/business/china-russia-thermal-plant-671/ At USD 270bn, China and Russia have signed the world's largest oil contract: http://www.marketwatch.com/story/russia-agrees-270-billion-oil-deal-with... China is the largest trading partner of most major countries like US to India to Nigeria to South Africa to Indonesia to both Koreas etc. https://www.cia.gov/library/publications/the-world-factbook/fields/2061.... It's not like China needs all of us, but more like, all of us need China! Plus, most of the links above are jealous and biased western media sites and not Chinese!
Thu, 02/13/2014 - 01:59 | Link to Comment hobopants
hobopants's picture

Dear god my eyes! indent man, indent!

Thu, 02/13/2014 - 09:16 | Link to Comment Dubaibanker
Dubaibanker's picture

Sorry mate... I tried everything....nothing worked.....the whole thing was dozens of paras and typed with sufficient indents and spaces in between sentences with more than 7 major points.

Despite reloading in a new page and in a new comment, the Preview as well as Save column kept consolidating everything!

Finally, I gave up!

Guess ZH is having some software issues? Now it is working.....:)

Thu, 02/13/2014 - 04:52 | Link to Comment Calculus99
Calculus99's picture

War = Peace

Credit = Gold

Sorry fuckheads, credit will NEVER = Gold...

Thu, 02/13/2014 - 05:00 | Link to Comment Remnant_Army
Thu, 02/13/2014 - 07:41 | Link to Comment eddiebe
eddiebe's picture

What's the big deal? I don't understand why their central bankers don't do what the Fed did. 

Allow banks to mark to their own model and print whatever they need to float the whole thing. There.

Thu, 02/13/2014 - 08:55 | Link to Comment Bogdog
Bogdog's picture

289 mil. cny = only $47 mil.

This seems like pocket change in the scheme of things.

Thu, 02/13/2014 - 09:27 | Link to Comment Dubaibanker
Dubaibanker's picture

1. China is receiving upwards of USD 110bn FDI inflows each year.

2011 FDI inflow: USD 115.85 bn

2012 FDI inflow: USD 111.72bn

2013 FDI inflows: USD 117.60bn 

http://online.wsj.com/news/articles/SB1000142405270230441910457932410069... 

2. FX reserves at USD 3.8tr

http://www.themalaymailonline.com/money/article/china-foreign-exchange-r... 

3. Monthly trade surplus at USD 31bn.

http://www.bbc.co.uk/news/business-26148707 

While China has become the world's largest trade country! 

http://www.ecns.cn/business/2014/02-13/100631.shtml

4. From 2% in 2010, to 20% in 2013, yuan is very rapidly becoming a trade currency aside from being a high demand investment currency thus causing stability as well as becoming more acceptable to many. 

http://www.ibtimes.co.uk/chinese-new-year-2014-rmb-internationalisation-... 

UK Chancellor of the Treasury almost was very enthusisatic about yuan on the floor of ICBC's London office: 

http://www.youtube.com/watch?v=pA-we6tbCoo 

Switzerland and UK along with Dubai, HK, Singapore are vying with each other to become the first and at least regionally to become the main centre for settlement and bond issuances in yuan.

5. Reforms always happen gradually, whether in China or in USA (who barely gave up slavery after hundreds of years just in the 1960's or in Europe which took decades post WW1 and WW2 to 'unite' and create EUR in 1999 which has almost failed just in 2014 (15 short years) and might end as an experiment also very very gradually over the next couple of years. Monetary unity without fiscal unity or without immigration unity or without unity on productivity or without political unity cannot last much long as an experiment.

Change and reform has to be gradual else the floodgates could open making a mess, just like in Russia after Gorbachev or Brazil when billions flooded in over the last 10 years and they had curb it after 2010 and even in Dubai when billions came since 2002 after real estate and stock market was opened to foreigners and when it left in 2009 causing a masisve decline.

Reforms are the main focus since 2013 in China as mentioned in their plenum last year and will become more so in 2014 and onwards as stated by the Shanghai mayor just yesterday. 

http://news.xinhuanet.com/english/china/2014-02/11/c_133106276.htm 

6. Deutsche bank has created a nice research note with all the data and believes that Chinese equities could rise 20% in 2014 among other growth and stabilising factors besides reforms across all the sectors of society. 

https://www.dbadvisors.com/content/_media/China_Themes_and_Strategy_for_... 

7. From Swiss Dr. Marc Faber in 2012 and Scottish entrepreneur Sir Tom Hunter (on Feb 11, 2014) are suggesting to GO EAST, YOUNG MAN! 

http://www.youtube.com/watch?v=IBsq3W7jajc 

http://video.cnbc.com/gallery/?video=3000244599

8. With USD 16trillion in debt in USA, if they can save AIG, Fannie Mae and Freddie Mac, Citibank, Merrill Lynch, Goldman Sachs, JP Morgan etc while having Madoff and fighting wars in the Middle East, why cannot China fight a weak banking system (which seems to be its only weakness unlike US or Europe who have multiple negatives from high debt to failing banks to ageing populations to declining productivity to downgraded Govts to frailing infrastructure and lack of spending power etc) with its USD 3.82 tr in POSITIVE reserves and all the other plus economicalyy positive points?  

9. Did I mention China is the only country buying gold? 

http://www.ibtimes.com/chinas-central-bank-may-be-stocking-gold-report-1... 

While ICBC being the largest bank in the world make USD 44bn per annum 

http://www.bloomberg.com/news/2013-08-29/icbc-first-half-earnings-increa... 

And, USA's JP Morgan makes a measly USD 20bn approx per annum! 

http://www.nasdaq.com/article/jp-morgan-profit-falls-wells-fargo-earning... 

Let's just look at the trade ports in East versus West. This is a fascinating chart: 

http://storymaps.esri.com/stories/2013/ports/ 

When 8 of the world's Top 10 largest ports are situated in China, does China really have to worry? 

http://www.ship-technology.com/features/feature-the-worlds-10-biggest-po...

China and Russia jointly are building the world's largest thermal dam: 

http://rt.com/business/china-russia-thermal-plant-671/ 

At USD 270bn, China and Russia have signed the world's largest oil contract: 

http://www.marketwatch.com/story/russia-agrees-270-billion-oil-deal-with... 

China is the largest trading partner of most major countries like US to India to Nigeria to South Africa to Indonesia to both Koreas etc. 

https://www.cia.gov/library/publications/the-world-factbook/fields/2061.... 

It's not like China needs all of us, but more like, all of us need China! Plus, most of the links above are jealous and biased western media sites and not Chinese!

Thu, 02/13/2014 - 11:08 | Link to Comment Going Loco
Going Loco's picture

I upvoted you for dogged re-posting persistence.

Thu, 02/13/2014 - 11:37 | Link to Comment NoTTD
NoTTD's picture

I down-voted you for the same reason.

Thu, 02/13/2014 - 11:36 | Link to Comment NoTTD
NoTTD's picture

Don't worry.  It's already priced in.  Whatever that means:

 

http://www.youtube.com/watch?v=XEL65gywwHQ

Thu, 02/13/2014 - 11:58 | Link to Comment realWhiteNight123129
realWhiteNight123129's picture

This is the way to go. PBoC is the only responsible central bank, keep the money market tight , pay nice interest to depositors and let bad borrowers fail. The PBoC is getting its standing enhanced not reduced by doing what teh Western central banks failed to do for 30 years.

 

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