China Credit Markets Tumble Most In 3 Months As Default Spooks Lenders, Deals Pulled

Tyler Durden's picture

UPDATE: It's happened - China has suffered its first domestic corporate bond default as Chaori fails to meet interest payments on schedule and rather more surprisingly failed to receive a last-minute mysterious or otherwise bailout...

  • *CITIC BANK WON'T HELP CHAORI MAKE INTEREST PAYMENT: 21ST HERALD
  • *SHANGHAI CHAORI DEFAULTS ON BOND INTEREST PAYMENTS, WSJ SAYS

But hey don't sweat it, Moody's think it's great news...

  • *MOODY'S: DEFAULT BY CHAORI SOLAR WOULD ADVANCE CHINA'S BOND MKT

Maybe tell the issuers that couldn't get their deals off today!!!

Of course what they mean is - maybe the market will finally start pricing in some real risk...

"Over the past few years, municipal governments and banks in China have stepped in to help distressed companies meet their bond payment obligations. These bailouts have led some investors to overlook the fundamental credit risks in bonds," says Ivan Chung, a Moody's Vice President and Senior Credit Officer.

 

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"A default would likely make investors recalibrate their risk-return consideration for onshore bonds. Credit risk would play a more important role in pricing, thereby making the bond market more efficient in the allocation of capital," adds Chung.

 

Chinese stocks are not happy

 

Wondering who's next? We explained here...


 

and there are a lot to come...

 

As Bank of America reports in an analysis by David Cui, the Trust defaults are about to get hot and heavy. To wit:

We believe that during April to July the market may see many trust products threatening to default, especially those related to coal mines. By our estimate, the first real default most likely could happen in May with a Sichuan lead/zinc trust product worth Rmb140mn. This is because the product is relatively small (so the government may use it as a test case), the underlying asset is not attractive (so little chance of 3rd parties taking it over) and we also have heard very little on parties involved trying to work things out. Whether this will trigger an avalanche of future trust defaults remains to be seen and this presents a key risk to the market in our opinion.

Ever since the specter of the first real domestic default on a Chinese corporate bond hovered over the markets, the Chinese credit markets have been leaking lower. The last 3 days have seen the biggest drop in Chinese credit markets in almost 4 months. That situation, wistfully occurring half way around the world while US equity markets press on to ever more exuberant (and ignorant) heights, meant at least 3 other Chinese firms pulled their bond issues today and, as Reuters reports, has "triggered widespread upheaval in the bond market." Banks are awash with liquidity (as indicated by low repo rates) but clearly unwilling to lend and external investors are now running scared.

 

The Chinese corporate bond market has suffered considerably in the last few days...

Even as repo rates have dropped (and CNY has strengthened) - repo rates at multi-month lows, CNY strengthening and stocks weak...

 

and SHIBOR at multi-month lows (suggesting plenty of liqudity at the banks but as we see below, a clear unwillingness to lend)...

And that has led to pulled issues...

Via Reuters,

The threat of China's first domestic bond default has prompted Suining Chuanzhong Economic Technology Development to delay a one billion yuan ($164 million) debt issue and two other companies have halted deals blaming market volatility.

 

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The run-up in corporate debt since 2008, and overcapacity in sectors such as steel, coal and solar energy, have threatened the solvency of many borrowers.

 

Chuanzhong said late on Wednesday that the news that Chaori Solar was set to miss a coupon payment on Friday "triggered severe upheaval in the bond market", so it had delayed its bond deal.

 

Taizhou Kouan Shipbuilding postponed a 300 million yuan issue of short-term commercial paper, while Xining Special Steel cancelled a 470 million yuan offering of medium-term notes, the companies said.

 

The deals are relatively small, but the delays underline the risk that an unprecedented default will make it harder for other companies to access capital.

 

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Yields on corporate and enterprise bonds pushed higher after Chaori Solar's announcement. Five-year AA rated notes rose 8 basis points to 7.77 percent, the biggest increase since November 15, ChinaBond data showed.

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This situation is being exacerbated as the lending is being cut to the indistries with the most slack - with the result (as we warned about in the past) that commodity-based collateral for all the shadow loans is getting hammered (through no real demand) and crushing the credit system (through haircuts and forced deleveraging as collateral values collapse)...

This is very negative for the Chinese economy which now more than ever is reliant on credit as its growth-driver... and the China credit-crisis indicator remains flashing red (2Y Swap - 2Y Bond spread)...

 

 

Charts: Bloomberg