China On The Verge Of First Corporate Bond Default Once More

Tyler Durden's picture

While everyone was focusing on the threat of tumbling debt dominoes in China's shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers - the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate - as well as shadow banking - bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.

FT reports:

The company has until March 7th to repay the interest, charged at an annual 8.98 per cent, the company said in a statement. “Due to various uncontrollable factors, until now the company has only raised Rmb 4m to pay the interest,” it said in the statement.


Trading in the Chaori bond, given a CCC junk rating, was suspended last July because the company suffered two consecutive years of losses. The company had a further RMB1.37bn loss in 2013, according to the results it posted on the exchange.

Just pointing out the obvious here, but how bad must things be for the company to be on the verge of default not due to principal repayment but because two years after issuing a bond, it only has 4% in cash on hand for the intended coupon payment?

Furthermore, as noted previously, China has so far been able to kick the can on its defaults for nearly three decades. Which is why suddenly everyone is focusing on this tiny company: Chaori Solar’s default – if it transpires – would mark the first time a company has defaulted on publicly traded debt in China since the central bank began regulating the market in the late 1990s. Bloomberg adds, citing Liu Dongliang, Shenzhen-based senior analyst at China Merchants Bank, that such a default would be the "first of a string of further defaults in China.”  FT continues:

Though the bond is relatively small, a default could deliver a sharp shock to risk management strategies in China vast corporate debt market, estimated by Standard&Poor’s to be $12tn in size at the end of 2013.


Any default could also slow down new issuance. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 per cent, from Rmb1.82tn to Rmb4.74tn, between December 2008 and September 2013.


In January, a Chinese fund company avoided a high-profile default, reaching a last-minute agreement to repay investors in a soured $500m high-yield investment trust, in a case that had sent tremors through global markets.

Then again, those who follow China's bond market will know that Chaori's failure to pay interest would not really be the true first Chinese corporate default: recall as we reported almost exactly a year ago:

For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th - and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings - owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits - and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms.

So yes: a prior default, and one by a solar company no less. However, going back down memory lane again, ultimately Suntech had the same fate as all other insolvent corporations in China do - it got a post-facto bailout:

Struggling Chinese solar panel maker Suntech Power Holdings Co Ltd is set for a $150 million local government bailout, a step towards tackling its $2.3 billion debt pile that is at odds with Beijing's effort to wean the sector off state support. The lifeline comes from the municipal government of Wuxi, an eastern city where Suntech's Chinese subsidiary is headquartered, and follows Shunfeng Photovoltaic International Ltd's signing of a preliminary deal to buy its bankrupt Chinese unit.

Curious why China's local government continues to balloon at an exponential pace, and has doubled in roughly two years to roughly CNY20 trillion (that's the real number - the official, made up one is CNY17.9 trillion or $3 trillion)? Because just like the Fed and ECB are the ultimate toxic bad banks in the US and Eurozone, respectively, in China all the bad debt ultimately disappears under the comfortable carpet of the broad "local government debt" umbrella. However, things like these must never be discussed in polite public conversation. Which is why despite what Guan Qingyou, an economist with Minsheng Securities said in his Weibo account that the "first default might not be a bad thing even that means more defaults might happen, because it is ultimately good for the market reform", the reality is that once the dam breaks, it may well be game over for a country that only knows one thing - how to kick the can ever further.

There are additional considerations: As the FT also notes, "given the squeeze on credit supply already seen in January this year, corporate debt defaults could further slow momentum in China’s fixed asset investments." In other words, the just announced 7.5% GDP target revealed ahead of the National People's Congress will be impossible to achieve, should China be unable to fund the Capex to build its burgeoning ghost cities, should rates spike.

Which is why this too default will ultimately be made to disappear.

And the next one, and the one after that, because "now" is never the right time to make the right, but difficult decision.

But how much longer can China avoid reality? Not much if one consider this just crossed headline on Bloomberg:


Recall coal is the industry that China's near-bankrupt Trusts have most of their exposure to.

And then there are our four favorite charts confirming the dire situation in China's credit market:







For those who need a refresh course on why the Chinese situation is rapidly going from bad to worse, read these several most recent comprehensive articles on the topic:

Bank of America warns further that a more confident government means the start of defaults...

With amazing speed in consolidating power in 2013, a more confident President Xi Jinping and team are expected to push for a wide range of reforms. 2014 will be the year for China seriously cleans up mounting local government and corporate debts which have been rapidly accumulated since late 2008. We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market

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prains's picture

they'll just dig a really big ditch and push all the bodies into it and bury it......nothing here folks

Groundhog Day's picture

This could only mean one thing, spx 2000. Get the spx 2000 fireworks ready, maybe by the end of tge month

prains's picture



they'll disappear like the two comments that were ahead of me on this thread and then.........satoshi'd....gone

FredFlintstone's picture

He is still here, posting like a legend!

UselessEater's picture

I've seen a few comments misplaced as well.... what's with that? At first I thought I just lost track of them on long threads but.... they weren't overtly offensive so what constitutes a posting breach?

spdrdr's picture

"they'll disappear like the two comments that were ahead of me on this thread and then.........satoshi'd....gone"

Who was the commenter?  I missed the start of the thread - but I live in hope that finally, one day, fonestar will be sent to Coventry... for good!

Threadjackers like fonestar deserve to have all their teeth pulled out.  Without anaesthetics.


zionhead101's picture

Fonestar is Tyler, thus he is immortal.

Hughing's picture

Enough already, Tylers, they will print like every other asshole CB. Wake us when someone actually defuckingfaults; CDS triggering mayhem defaults.

disabledvet's picture

Ummm "who is they" and "define default."
They don't call it "the new normal" for nothin'.

TruthInSunshine's picture

China really is in a class all unto itself when it comes to both the extent & interwoven nature of its corporate-banking accumulated & further souring bad debts.

I imagine the Chinese Bureaucracy can keep covering thede bad debts for a while longer still, to assure & calm "investors," but there would a point where either inflation intra-China is going to 'go Argentina,' or the false faith in their fraudconomy will be shattered once & for all.

maskone909's picture

I dont know exactly how any accounting really gets done in that place. Absolutely nothing is transparant and to my knowledge they dont have to disclose jack sheeit.

What i do know is that the s&p 200dma hasnt been breached in about a year. The 50dma hasnt gone below the 200dma in like two years and change. They act like this is a good thing lmfao. If my retirement was in the market i wouldnt be able to sleep at night. Truely scary times!

TruthInSunshine's picture

2007 didn't hold a candle to the totally surreal, bizarre nature of today. Not even close, because the macro backdrop is so FUBAR regarding such a wider set of asset classes now, even extending to the sovereign asset level, whereas 2007 mainly was FUBAR regarding residential, commercial, office, etc. real estate and securitization of them based on grossly fraudulent valuations -'so the FUBAR of 2007 was highly concentrated centered around RE and its chattel paper.

1999 was closer to today in terms of mispricing - but again, it was not nearly as broad a mispricing, with a concentration on, tech & other high beta equity assets being irrationally priced.

Today is so much further FUBAR in so many more ways that it's genuinely unprecedented.

Like I have said, when future case studies about this era are written, and the truth slowly drips out and is revealed and analyzed, I won't be surprised if the central banks weren't DIRECT & active participants in the fraud and if they had their hands all over things that directly violated their explicit mandates and exceeded the basic and clear scope of their authority by a factor of 1000 fold.

We really are living in a totally centrally planned economic insane asylum.

BringOnTheAsteroid's picture

You're assuming there will be someone around to conduct future case studies. We've had several disturbing starts in quick succession at war between China and Japan, then Ukraine and Russia. Both of these near conflicts had potential to drag the entire world into WWIII. This would lead instantly to global economic collapse and unprecedented chaos. All well and good, the world has been there and done that before - but not with 500 fucking nuclear reactors that need an UNITERUPTED supply of power for the remainder of our lives.

If I stop and think about this too long I get a sickening feeling in the pit of my stomach. We are fucked, beyond any reasonable measure.

maskone909's picture

Well if its any comfort, your not alone. Its horrifying stuff. I have to take 100mg Benadryl to sleep and that still doesnt always work

BringOnTheAsteroid's picture

I'm not scared of death by any means, but I never considered until relatively recently that a lingering death by radiation sickness may well be in our futures. It's palpable. We will shortly have proven ourselves to be nothing more than a bacteria colony that has bred, unchecked, until all the resources are gone.

Uber Vandal's picture

Does anyone know how many derivatives are tied / daisy chained to these?


prains's picture

you'll have to follow a lot of tongues

<---- especially this dudes tongue

sixsigma cygnusatratus's picture

Have we reached peak moral hazard yet, and will the coyote finally look down?

UselessEater's picture

No we still have a few accounting tricks and other sh*te up our sleeves.....

"Prime Minister Tony Abbott has revealed that Qantas asked the Government for a $3 billion unsecured loan, but says Cabinet rejected the request because the airline does not need it......Deputy Prime Minister Warren Truss says Qantas is not in imminent danger of failure, with around $2 billon worth of cash on hand.....Qantas boss Alan Joyce and senior union leaders will meet in Sydney today after both sides met for the first time last Friday, the day after the company announced its $2 billion cost-cutting strategy."

chump666's picture

In a world where you can invade countries and say you not invading rally markets and fire ICBM missiles...

Your turn China, be creative.

max2205's picture

Chicago rated down to triple shit CCC

earleflorida's picture

China and Russia to build a new Great Wall, and it will be called-- 'The Silk & Iron Curtain Landbridge Global Road'                         ('2001 / 20Year Strategic Treaty')

Note:  China and Russia will pool resource funds out of USSA and concentrate on EuroAsia consolidation?!?


bart12's picture

When you put a article title with a description " on the verge", this means no default! Please post an article when actual default happen!!

Grande Tetons's picture

Walter Mondale was on the verge of winning the 1984 election against Reagan. 

Verge is an old Nordic word which means Minnesota.

mobydick's picture

China will grow at 7.5% this year and they are buying any residential property that comes up for sale. It's all good here in Oz. What could possible go wrong.

JPM Hater001's picture

Yippie ki yey... Why does this feel like a slow start to a greet Bruce Willis movie ?

thestarl's picture

All went wrong along time ago down here mate basically when white man landed just open your fucking eyes pal.

Say what you what you want about the old abo but those sons of bitches they knew how to live off the land. survived for 40 thousand years before we fucked them but don't worry MD karma's a real bitch man.In a hundred years man our resources depleted this place will be a fucking hellhole and it could've been so different.

The rent seekers run this place. 

Element's picture

That Corporate debt graph look like Madame Pacific-Rim-'o-Fire is about to clear her throat and start singing.

Spectre's picture

Considering these Coal & Solar bond issuances are so miniscule compared to structured Real Estate Bond portfolio's.

Can you imagine the fireworks when "Ghost City" Bonds become worthless.  What a display it will be.


My only fear as a stacker will be the eventual need for China to sell gold to cover.  Yikes !

bluskyes's picture

Maybe China expects to be nuked, and wants to be able to relocate it's people with minimal disruption.

Balanced Integer's picture

If by "fear," you mean "Back up the truck!" I'm with ya.

Joebloinvestor's picture

You cry wolf enough and it won't be a big deal when he really shows up.

AR15AU's picture

"a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products"

Dear zero hedge... I'd like to tell you about a financial product called gold.


ebworthen's picture

Reminds me of U.S. Auto loans, Student loans, the reflation of the home loan bubble, and the FED balance sheet.

Yes, the fiat fake money wizards are sacrificing the future for the present, AGAIN.

maskone909's picture

Not to mention increasing trade def's, 110% debt/gdp, dwindling demographics, out of control monetary base and velocity stagnation not seen since.... The depression?

Yeah everythifngs great :(

Hero Protagonist's picture

CNBC asks Rare bond default warning in China a good thing? Is up really down?  Is good really bad? I guess if you ask enough questions, nothing really matters, right?

iLiquid's picture

$12 trillion corporate bond market (these are official numbers - the unofficial, and accurate, one is certainly far higher)

You Durdens are nuts and unthinking sheeple.  In China, bond issuance is difficult as hell (for the not-so-connected-with-government-ly 99% of the 1%).  Unlike international tade data that are more or less a shadow account of "copper financing" arbitrage number games -- thus massively "leveraged" (read fraudulent) -- bond issuance is in tight grip of the big gov and its branches - the SRC (SEC equivalent), the Shanghai & Shenzhen (wondering how many of your Durdens can accurately spell Shenzhen) security exchanges and the Interbank Clearing House.

Moreover, a huge chuck of the "corporate" bonds are issued by the "local government financing platforms" or "municipal investment companies" -- i.e. shell "corporations" that exist solely to borrow money and finance its local government's infrastructure investment squandering.  The coupon rate on those abominations should have been 30% as they have LITTLE CASH FLOW for repayment of interest & principal, but in reality they can borrow at 7% due to the market pricing in their government connection (hence "implicit gurantee").  Everyone knows they're shitty junk but everyone is buying these government turds, because China is sinking and there's NOTHING ELSE LEFT TO INVEST IN.  Once you exclude these phony "corporations" from all corporations, you get LESS real corporate bonds not MOAR.

headhunt's picture

So most of China's bond debt is actually a poorly disguised Ponzi scheme?

q99x2's picture

One thing I've never seen in my entire life is snake shit; not that I've recognized. Probably a lot of bones.

kurt's picture

Resembles bird shit but dryer. Like their arborial bretheren there is a black spot, usually. Most scientists agree as to the composition of the black spot. Findings indicate that it has been anylized to be bird and/or snake shit, too.

Ban KKiller's picture

I miss overgrow...

Rising Sun's picture

Jerry, it's Frank Costanza! Mr. Steinbrenner's here, George is dead, call me back!

fijisailor's picture

China should be able to paper over any bad debt just like the FED.  Why is there any difference?

Georgia_Boy's picture

In other words, massive inputs of money from China are why the price of solar has come down so much, not because of the inherent competitiveness of large scale solar power, not because of technology advances, and certainly not because of the social justice activists raising awareness (i.e. waving their placards and chaining themselves to the White House fence).

Funny how whenever you see all the alternative energy articles in the MSM on the growth of solar, and how solar has come down so much in price, and the installed base of solar has grown such-and-such percentage per year for the last three years, you never hear about stuff like this. The money had to come from somewhere, and now the de facto subsidies are found to be economically unsustainable.

But they won't listen, China might as well be Mars to your average American hipster. "It was a conspiracy, the tea party oil company sum have been trying to suppress solar the whole time because they knew they'd lose money!"

AdvancingTime's picture

Don't look to close at what is happening in China or fear of contagion might set in. As long as China grows many people think all is well. Few Americans are aware that companies in China are struggling to repay loans on factories that sit idle from weak demand. More on this situation in the article below,


Dubaibanker's picture

In Brazil, OGX defaulted, In India Kingfisher defaulted, In USA, Detroit and Stockton defaulted, Lehman too, ....hmmm...some of the largest bankruptcies have happened in USA itself.

Entire municipalties are defaulting in USA:

And this is with over USD 16trillion in debt and counting....

This map is cool...and I see US written all over it...

Shit happens....:)

Sufiy's picture

Koos Jansen: Chinese Physical Gold Demand YTD 369t Up 51 % Y/Y 

Koos Jansen continues his remarkable work reporting the real demand for Gold in China. According to his information this demand is on track for another record annualised so far and is up 51% on Y/Y basis. Geopolitical shift with the Ukraine situation will only add to this fire and ongoing Financial War will claim its victim US Dollar. Currency Wars: The Yuan's Silent Scream - Portrait Of A Derivatives Bomb Being Detonated TNR.v MUX GDX GLD