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China Folds On Reforms - Bails Out 2nd Shadow-Banking Default After "Last Drop Of Blood" Threats

Tyler Durden's picture




 

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.

 

We noted the "technical default" of Jilin Trust last week, and despite its de minimus size, China Development Bank loaned CNY 2bn to the verge-of-bankruptcy Liansheng coal company, and thus bailed out investors in the trust -  piling on the moral hazard.

 

The Jilin Trust default, as we noted last week, was the second notable 'technical' default among Chinese wealth management products recently and caused consternation among investors:

Investors in the Jilin Trust product are demanding that CCB also take responsibility for compensating investors, 21st Century Business Herald reported on Friday.

 

Bankers have warned that China's lenders are exposed to vast swathes of loans extended by their non-bank partners and sold to bank clients as off-balance-sheet wealth management products. Though banks are not legally responsible for repaying investors in such cases, they may face pressure to do so in order to maintain their reputations and uphold social stability.

 

"A few days ago, we went looking for CCB. CCB's leader in Shanxi still says it's not his responsibility. In the end, if they really don't take responsibility, we'll go to CCB and fight a war to the last drop of blood," the paper quoted an unnamed product investor as saying.

 

Investors told the paper that all paperwork and fund transfers related to their purchase of the Jilin Trust product had occurred on CCB's premises and CCB sales staff had verbally assured investors that the product carried no risk. They also said their willingness to invest was based on their confidence in CCB as a large state-owned bank.

 

And so what do the Chinese authorities do? Instead of letting a small trust face actual losses, they do what JPMorgan warned would "amplify future losses"...

 

Via Bloomberg,

China Development Bank lent 2b yuan to coal company Shanxi Liansheng, which owes almost 30b yuan to lenders including banks, trusts and asset management firms, 21st Century Business Herald reports, citing unidentified people.

 

The policy bank is the co.’s largest creditor, with 4.51b yuan in outstanding loans, the report says

 

The loan will be used to repay maturing trust products sold to retail investors: report

 

Three local firms will also pay 3b yuan to buy 50 percent of Liansheng, which is based in the northern province of Shanxi, the report says, without identifying cos buying stake

 

Funds from the stake sale will also be used to repay maturing trust products: report

 

Repayment of bank loans and single trusts will be delayed

 

Liansheng, the largest private coal miner in Shanxi, is owned by Chinese entrepreneur Xing Libin, according to the report

 

Liansheng borrowed more than 5b yuan through 6 Chinese trust firms including Jilin Province Trust and Chang’an Trust, China Securities Journal reports separately, citing unidentified people.

 

As a reminder, this is what one analyst said of the Chinese coal industry that just got yet another bailout:

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.

 

Of course, it's not over yet - as the following chart shows, there are a lot more "maturing" trusts to come in the next 3 months alone...

 

 

 

Allowing investors to be bailed out merely exacerbates the risk-taking mentality and solidifies a belief in a government back-stop (to 10%-yielding highly risky loans to an insolvent industry!!)...

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...

 

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Mon, 02/17/2014 - 15:25 | 4445374 Ancona
Ancona's picture
  1. Moral hazard? This is fear at work. Pure and primal
  2. PBOC is screwed and htey know it.
  3. They can never let the shadow bank system go under....ever.
  4. Paging Ben Bernanke...Ben Bernanke?
Mon, 02/17/2014 - 15:27 | 4445379 fonestar
fonestar's picture

There is no Ben.  Only Janet.

Mon, 02/17/2014 - 15:42 | 4445399 Oliver Jones
Oliver Jones's picture

There is no Dana, only Zuul.

(Video)

Mon, 02/17/2014 - 15:49 | 4445432 drstrangelove73
drstrangelove73's picture

Many Shuvs and Zuuls knew what it was to be roasted in the depths of the Slor on that day,I tell you!

Mon, 02/17/2014 - 17:03 | 4445625 MisterMousePotato
MisterMousePotato's picture

Your girlfriend's a dog.

Mon, 02/17/2014 - 17:18 | 4445690 shanearthur
shanearthur's picture

Where do these stairs go?

They go up!

Mon, 02/17/2014 - 17:44 | 4445783 EuropeanBankster
EuropeanBankster's picture

Hey, this is real smoked salmon from Nova Scotia, Canada, $24.95 a pound! It only cost me $14.12 after tax, though. I'm givin' this whole thing as a promotional expense, that's why I invited clients instead of friends

Mon, 02/17/2014 - 19:04 | 4446028 Boris Alatovkrap
Boris Alatovkrap's picture

Boris is also prefer smoke salmon, even if rolling paper is soggy.

Mon, 02/17/2014 - 20:53 | 4446322 ThroxxOfVron
ThroxxOfVron's picture

Boris knows my friend Bogart The Salmon?

Mon, 02/17/2014 - 23:47 | 4446817 old naughty
old naughty's picture

them grasshoppers learned well from their amkra counterparts (eh, masters)...

printoblivion !

Mon, 02/17/2014 - 19:28 | 4446092 StychoKiller
StychoKiller's picture

"These stairs, do they go down as well?"

Mon, 02/17/2014 - 15:35 | 4445402 Boris Alatovkrap
Boris Alatovkrap's picture

yu no si hau li li badu isu chaina ban king

Mon, 02/17/2014 - 15:38 | 4445411 NoDebt
NoDebt's picture

A Russian with a heavy Russian accent (even when writing, amazingly enough!) posting a reply in a Chinese accent to (mostly) English speaking readers.

BOOM!  My head just exploded.

Mon, 02/17/2014 - 15:50 | 4445435 pods
pods's picture

This ain't quite as sexy as pigs floating down the river which you cannot see due to smog but still illustrates a problem.

Next thing you know they will be putting melamine in pet food and baby formula.

pods

 

Mon, 02/17/2014 - 16:26 | 4445522 Boris Alatovkrap
Boris Alatovkrap's picture

Old adage...

If pig can swim

Mon, 02/17/2014 - 17:02 | 4445621 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Dog can drive Mercedes ...

 

Mon, 02/17/2014 - 16:25 | 4445518 Boris Alatovkrap
Boris Alatovkrap's picture

Stuff is happen. Good thing you are signup Obamacare!

Mon, 02/17/2014 - 19:20 | 4446069 Offthebeach
Offthebeach's picture

Medications being more made in China. No need for Obamacare Death Panels, just keep going to doctors.
Maybe if your family pays Obamacare Doctor some cash, you'll get good medications, or perhaps know someone overseas, outside of People's Democracy that can smuggle in anti-cancer drugs for sick kin.

Mon, 02/17/2014 - 15:35 | 4445404 Winston Churchill
Winston Churchill's picture

He is busy right now , trying to short gold.

Mon, 02/17/2014 - 16:39 | 4445555 midtowng
midtowng's picture

When your bubble is enormous, the tiniest pin looks scary.

Mon, 02/17/2014 - 17:23 | 4445706 Bangin7GramRocks
Bangin7GramRocks's picture

What is so scary? They created some fake money to cover a hole in a company that exists on fake money. There is no reality in the system anywhere in the world. Bobby McFerrin that shit man!

Mon, 02/17/2014 - 15:25 | 4445376 ACP
ACP's picture

Boner contracting out his "folding" services to China now?

Mon, 02/17/2014 - 15:28 | 4445382 Stuck on Zero
Stuck on Zero's picture

Moral Hazard?  Is that a new bank or investment vehicle I should be investing in?

 

Mon, 02/17/2014 - 20:55 | 4446331 ThroxxOfVron
ThroxxOfVron's picture

Moral Hazard Too Hi Trust shares for ALL!

Mon, 02/17/2014 - 15:28 | 4445386 Son of Loki
Son of Loki's picture

"There's never been a better time then now to be a Financier Fraudster."

Mon, 02/17/2014 - 15:33 | 4445389 LawsofPhysics
LawsofPhysics's picture

Like I have said before.  China wants nothing to do with the reserve currency.  They like things progressing just the way they are...

Mon, 02/17/2014 - 16:15 | 4445463 LMAOLORI
LMAOLORI's picture

 

 

You really couldn't institute a global totalitarian society without the power of the printing press. This is why I always say this can go on for a lot longer than many people think. The pain to the serfs is not an issue in the equation.

Mon, 02/17/2014 - 16:40 | 4445560 Caviar Emptor
Caviar Emptor's picture

Yes. And as I have said since the crisis, the US and China economic "systems" must of necessity gradually converge. Only way you can maintain status quo.

Mon, 02/17/2014 - 15:31 | 4445391 unplugged
unplugged's picture

the bailouts will continue until morale improves

or the shooting starts - whichever occurs first

Mon, 02/17/2014 - 15:54 | 4445443 Major Major Major
Major Major Major's picture

The shooting won't start until after the bail-ins, I'm afraid, if ever.

Mon, 02/17/2014 - 18:37 | 4445954 jerry_theking_lawler
jerry_theking_lawler's picture

speaking of bailouts....i wish the .fed would've been around as my boat with all my PMs, guns, and ammo was sinking...I could've used a hand bailing it out before it was a total loss. oh well.

Mon, 02/17/2014 - 15:36 | 4445393 Dubaibanker
Dubaibanker's picture

Hot off the Press:

Forget China....101 year old bank with 930 branches, being the Top 5 banks in Thailand is having a classic bank run with over USD 1bn cash in withdrawals within the last 24 hours.

http://online.wsj.com/article/BT-CO-20140217-703704.html?

Run on Thai Bank Linked to Rice Subsidy Weighs on Economy -- 3rd Update

 

It's a fugazi....fugazee...

101 year old bank

Owned by Thai Government and one of the Top 5 banks in the country.

While the PM is under siege.

Mon, 02/17/2014 - 15:51 | 4445438 pods
pods's picture

Maybe they can get some tips from that broad in Argentina and fine the bank for not keeping enough money in it?

pods

Mon, 02/17/2014 - 16:16 | 4445453 Dubaibanker
Dubaibanker's picture

Perhaps.

It would be better if all these pesky villagers could all get credit cards as well as debit cards so that they did not require cash but used their binary numbers on a computer screen and we would all be done with it and never have a bank run ever, with BenLen (Ben and Yellen) selling their money printers to the Thais or anyone else who cared to ask along with their accounting skullduggery. But alas, these pesky villagers will only work on cash. No binary digits nonsense for them!

Alas, no utopia for the masses! /sarc

Mon, 02/17/2014 - 16:03 | 4445461 TruthInSunshine
TruthInSunshine's picture

Thanks for the link, DT.

By the time people start to panic, it's typically too late to prevent the anal rape.

And to your Fugazi reference, cue up the aptly titled "Waiting Room:"

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

Mon, 02/17/2014 - 16:23 | 4445509 Dubaibanker
Dubaibanker's picture

My Fugazi reference was more this one: http://www.youtube.com/watch?v=oEJza1-4zRk

But yours was nice too. Thanks. Cool guitar and great drums!

Mon, 02/17/2014 - 16:59 | 4445482 LMAOLORI
LMAOLORI's picture

 

Mon, 02/17/2014 - 16:57 | 4445602 Caviar Emptor
Caviar Emptor's picture

Bail 'em out! We can't have contagion now, it might ruin springtime travel and fashion plans for our friends who need a rest after Davos!

Mon, 02/17/2014 - 15:42 | 4445405 NoDebt
NoDebt's picture

When this story hit over the weekend, I replied to somebody who was concerned about the repurcussions in the paper market this delay/default would have saying roughly this:  "This is not the end of the paper market.  Sit. And. Watch.  I don't want to give away the ending, but I think you'll be amazed."

Ladies and Gents, I present you the PBOC.  The biggest bailout machine on the planet.  They give the Fed penis envy.

Mon, 02/17/2014 - 15:35 | 4445406 KidHorn
KidHorn's picture

They saw what happened after Lehman and learned from it.

Mon, 02/17/2014 - 15:41 | 4445418 NoDebt
NoDebt's picture

Simply put but, yeah, that's basically it.  Chinese are good at copying from others.

Mon, 02/17/2014 - 15:40 | 4445416 thamnosma
thamnosma's picture

In the shuffling madness
Of the locomotive breath,
Runs the all-time loser,
Headlong to his death.
He feels the piston scraping --
Steam breaking on his brow --
Thank God, he stole the handle and
The train won't stop going --
No way to slow down.

Mon, 02/17/2014 - 15:41 | 4445420 gwar5
gwar5's picture

If China won't let anybody collapse, then FED won't push over the first dominoe either. And can't help but notice there's been no talk of Chinese depositor bail-ins and confiscations of personal savings.

 

Mon, 02/17/2014 - 15:56 | 4445447 angel_of_joy
angel_of_joy's picture

At least they don't pretend being a "capitalist" country with a "free market"... or something.

Mon, 02/17/2014 - 16:09 | 4445478 toady
toady's picture

The Chinese don't have personal savings. 95% of the population live on less than $1 a day,, and everyone who is doing well is a) underwater on their real estate or 2) leveraged to the hilt on their next scam.

Mon, 02/17/2014 - 16:44 | 4445567 Droel
Droel's picture

Yeah but that other 5% that's buying real estate the world over with cash is a huge 5%.

Mon, 02/17/2014 - 16:55 | 4445593 Hongcha
Hongcha's picture

Droel; correct.  They are making money faster than they can allocate it and their own RE market is shakier, more bloated and opaque-er than even ours.

Mon, 02/17/2014 - 20:43 | 4446303 laomei
laomei's picture

Haha, wrong.

Mon, 02/17/2014 - 15:49 | 4445431 detached.amusement
detached.amusement's picture

So what happens when every bank on the planet operates on a wink and a nudge?

Mon, 02/17/2014 - 15:49 | 4445434 q99x2
q99x2's picture

I want a printing press. Damn it.

Mon, 02/17/2014 - 15:51 | 4445437 TheGoldMyth
TheGoldMyth's picture

Do they/banks pay any interest on the bailout money?? Please !! does anyone here know??

Mon, 02/17/2014 - 16:14 | 4445497 disabledvet
disabledvet's picture

says in the story "it's a loan."
which is different from a bailout.
which is different from a grant.
which is different from a sinecure.
which is different from a guarantee.
which is different from a warranty.
which is different from insurance.
which is different from securitized debt.
which is different from a loan.

return to top...go back down list.
add a line where ever anyone feels "new financial products still need mentioning."

Mon, 02/17/2014 - 21:02 | 4446350 ThroxxOfVron
ThroxxOfVron's picture

My fortune cookie contained an IOU I had written to myself.

I'm suddenly rich!

-But, I'm hungry again before I've even finished eating...

Mon, 02/17/2014 - 15:52 | 4445439 debtor of last ...
debtor of last resort's picture

Every floating pig deserves it's own credit card and Myra account. For me, maybe i'll book a Branson flight to the moon and stay there.

Mon, 02/17/2014 - 16:01 | 4445454 Tinky
Tinky's picture

What's with the flat-line at $1328 for gold? Trading halted?

Mon, 02/17/2014 - 16:05 | 4445464 nixy
nixy's picture

Still flat lined for over 90 minutes........

Mon, 02/17/2014 - 16:08 | 4445477 Winston Churchill
Winston Churchill's picture

Markets are closed until around 8pm est.
Not to worry, the BIS will prlly mount a short raid then.

Mon, 02/17/2014 - 16:11 | 4445481 thamnosma
thamnosma's picture

Holiday trading hours, that's all.

Mon, 02/17/2014 - 16:13 | 4445491 Tinky
Tinky's picture

Thanks.

Mon, 02/17/2014 - 16:04 | 4445465 Harry Dong
Harry Dong's picture

Root cause. Coal prices dropping like a stone. Dug too much stuff up. Even Australia mothballing projects. Time for constructive destruction of capacity. But misallocation of assets is not being corrected. 

Reminds me of us housing.

 

Mon, 02/17/2014 - 16:33 | 4445531 TheGoldMyth
TheGoldMyth's picture

Harry Dong...I live in Australia and practice my freshly baked/invented "economic climate change science".  The recent fall in the Baltic Dry Index that also reflects a drop in coal transport tells me to expect more cold weather using the also freshly baked science of "climate science" not invented by me that claims CO2 causes weather.

Well then....iu just put two and two together and am able to accurately predict with great success that it will keep getting colder as the economy and CO2 production capacity grinds to a halt. Forclosed houses have an almost zero emission of CO2 other than CO2 from computers to keep the foreclosure data alive.

The weather has been a bit too cold for a summer here. Maybe that is why they had to burn some coal reeently in a fire that mysteeriously started at one of our coal mines..  To increase CO2 so we can get our warmer weather back? :-)

Reminds me of increasingly bizzare behaviour. They forgot to give the fire crew respirators to protect against Carbon Monoxide...Can you believe it?? To fight a coal fire in a coal mine.

Mon, 02/17/2014 - 16:49 | 4445584 KidHorn
KidHorn's picture

The warm air went to Sochi

Mon, 02/17/2014 - 20:42 | 4446300 Element
Element's picture

Got to agree with you there, been a real cool summer this year, loved it, should be more of it. Just the poor sods in Adelaide and Melbourne got the heat this time, everyone else was so much cooler.

Mon, 02/17/2014 - 16:07 | 4445475 SmittyinLA
SmittyinLA's picture

Heroin addicts love company, just a lil taste, put off that ugly reality a lil longer

Mon, 02/17/2014 - 16:12 | 4445489 Comrade de Chaos
Comrade de Chaos's picture

Let's the games begin, whoever panics the first, loses the least. 

 

p.s. Got fisked (biggest VC flop in S Ca., 1.4 down the drain ...) 

http://www.socaltech.com/fisker_automotive_goes_to_wanxiang_in_bankruptc...

Mon, 02/17/2014 - 16:41 | 4445564 Wait What
Wait What's picture

don't know how many times I've said it, but it always fits: "catalyst? nothing a little liquidity can't paper over"

they will continue to play this game until they can't...

Mon, 02/17/2014 - 23:44 | 4446809 UselessEater
UselessEater's picture

liquid paper better than tipex......

Mon, 02/17/2014 - 16:59 | 4445608 Fix-ItSilly
Fix-ItSilly's picture

This article is a bit premature or immature.  Take your pick.

To write an informative article on this matter, one should first inform us if the 3B equity infusion is for real or a sham.  Has Libin been severely diluted?  If so, what's so wrong here ? - Shanxi Liansheng was restructured with risk capital added.

But this is China...  where toothpaste can kill you.

Mon, 02/17/2014 - 17:52 | 4445807 malek
malek's picture

The Chinese have it easier.
They don't need to let a Lehman go belly up first to extort a blank check from anyone, or window-dress unlimited bailouts towards the public - they just do it!

Mon, 02/17/2014 - 17:56 | 4445830 RaceToTheBottom
RaceToTheBottom's picture

Let the printing Olympics begin

Mon, 02/17/2014 - 18:17 | 4445865 buzzsaw99
buzzsaw99's picture

asian contagion theory = raff my ass off

<-- zerohedge = blog of many soros

Mon, 02/17/2014 - 18:40 | 4445966 post turtle saver
post turtle saver's picture

Japan 2.0, the sequel

Mon, 02/17/2014 - 19:12 | 4446040 LongMarch
LongMarch's picture

But But they can't do that! They're gonna back their currency with gold!!!

All those fine theories about a gold CNY are just that:theory. You gold bugs need to find a new narrative.

Mon, 02/17/2014 - 20:49 | 4446317 Unpopular Truth
Unpopular Truth's picture

If they can hold off until the value of gold climbs to a true market level ($7k?) - would they be able to pay it all back?

Tue, 02/18/2014 - 00:19 | 4446901 Leraconteur
Leraconteur's picture

Really guys, the Chinese really think that prices for assets only go up.

When they drop, they assault the homeowners who sell at below their price, attack the buyer that bought below their price, as though those two caused them to lose money by making the value of their properties drop.

Tue, 02/18/2014 - 07:43 | 4447329 vyeung
vyeung's picture

I doubt its that simple. I'm sure Kerry's recent visit had some degree of influence considering he's a messenger for wall street. Don't forget, there is alot of $$$ tied up in China via US and European companies.

 

In general, the communist party have no issue in tanking the markets, they have shown considerable convictions in the past. It will depend on the overall agenda and direction they want to achieve,

 

I would not read too much into this as they know how to whip the financial community at will unlike the US congress/President who are meer prostitutes of wall street and London bankers who really hold the pearl strings.

Tue, 02/18/2014 - 09:59 | 4447610 Fred123
Fred123's picture

Oh, you must have it all wrong. The Chinese are SOOOO smart that they thought of this beforehand, and anyways, the laws and principles of economics/finance don't apply to the Chinese.

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