"Magic" Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China

Tyler Durden's picture


While the world is terrified about what China - where corporate bond defaults are now permitted - may be about to unleash on the world, most are all too happy to remain in a state of delightful ignorance. We decided to take a peek behind the scenes.

Recall that as we have repeatedly shown in the calendar of coming Chinese bond default, on March 31, a borrower named "Magic" (no comment) is set to default on a CNY196 million Trust.

The default may or may not happen, as there is always a high likelihood it will simply be bailed out as has happened frequently in the past, but regardless of the final outcome, here is what is really going on behind the scenes. From Bank of America:

31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust


Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.


Potential outcome: The developer and the trust company may share the repayment.


Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.

Please re-read that first part again:

CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.

So, "Magic" not only sold the collateral... but also mortgaged it to a few other lenders: lenders who count its as a perfectly performing asset when in reality they have zero claims to it. Did they steal that straight from the MF Global instruction manual?

Now add this:

"The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer."

... and multiply by a few thousand for all the other shadow (and not so shadow) players who have engaged in precisely this kind of gross abuse of underlying collateral, which also happens to be the main reason why China can magically create trillions in debt out of thin air with zero collateral constraints, each and every year, no questions asked.

Well, the time to ask a question or two has finally arrived.

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Tue, 03/11/2014 - 12:57 | 4534693 desirdavenir
desirdavenir's picture

rehypothecation is so much fun !

Tue, 03/11/2014 - 13:06 | 4534712 Thought Processor
Thought Processor's picture



So much real estate hokus pokus going on in China that at some point it will plunge.  It will happen just a question of when.


Most Chinese have few areas to invest their money in, and real estate it one they can.  So they buy up places and let them sit empty.  Then they use their property as assets to secure more (and often underground lending where they maybe only need to show proof of their asset holding documents) financing so that they can go buy more real estate.  And the process repeats until........


This is common all over China.


Like everything else, it works until it doesn't.  Once prices start to fall the system quickly reverts.

Tue, 03/11/2014 - 13:13 | 4534725 BaBaBouy
BaBaBouy's picture

Is The FED Any Better ???????????????????????


BUY PHYS GOLD, Bitchez...

Tue, 03/11/2014 - 13:21 | 4534778 Skateboarder
Skateboarder's picture

We called it Social Security?

Tue, 03/11/2014 - 13:24 | 4534790 zaphod
zaphod's picture

This is why despite how horrible the dollar is, everyone keeps running back to it as a safe haven. Everything else is even worse. 

Tue, 03/11/2014 - 13:30 | 4534824 Ifigenia
Ifigenia's picture

I would rather park in Gold

Tue, 03/11/2014 - 13:36 | 4534853 Manthong
Manthong's picture

Credit is money, everything else is gold.

..or something like that.

Tue, 03/11/2014 - 13:39 | 4534872 NoDebt
NoDebt's picture

Hold on, guys, don't I recall similar things happening with Spanish mortgages?  Multiple claims on the same property as collateral (or a property that never existed)?

I think we've seen this movie before just in a different theatre.

Tue, 03/11/2014 - 13:44 | 4534894 Thomas
Thomas's picture

China and a guy getting a humjob off a 90-year-old hooker are thinking exactly the same thing: "Don't...look...down."

Tue, 03/11/2014 - 14:11 | 4535003 GetZeeGold
GetZeeGold's picture




Remember the long lines to buy gold in China?


Long history of being dumped on in China.....here we just trust CNBC.

Tue, 03/11/2014 - 14:30 | 4535101 max2205
max2205's picture

LOL.  Sub prime tranches at the lkcal level...CaBoom

Tue, 03/11/2014 - 15:00 | 4535248 DoChenRollingBearing
DoChenRollingBearing's picture

While neither I nor we make loans to China, per se, we do depend on them to deliver our bearings after we send them our money!

Here ya go, China, here´s our money.  Now ship us our bearings!

Tue, 03/11/2014 - 15:07 | 4535292 FEDbuster
FEDbuster's picture

Maybe COD will make a comeback?

Tue, 03/11/2014 - 15:16 | 4535342 Herd Redirectio...
Herd Redirection Committee's picture

Hey, the place was called 'Magic Property', what do you expect?  Actual land and buildings?

Tue, 03/11/2014 - 16:01 | 4535517 macholatte
macholatte's picture


what's with all the Doom & Gloom?

There is a solution to all this: China & Japan go to war. 

Simple, clean & easy.  Solves lots of problems..... population control, over building, currency re-boot and the opportunity to watch the American sheeple go deeper into debt as they bail-out the warring countries.

God created man. Samuel Colt made them equal.

Man created governments. Robert Oppenheimer made them equal.

Tue, 03/11/2014 - 16:12 | 4535566 Muppet Pimp
Muppet Pimp's picture

OT: Speaking of Magic Real Estate:

For Sale: Authentic 8 bed/8 bath Illuminati/Masonic Castle on 71 acres in Rockwall, TX. Great shape. 950K (214) 237-4500

Tue, 03/11/2014 - 16:19 | 4535597 Sirius Wonderblast
Sirius Wonderblast's picture

As someone who loves a good castle, that makes me weep. No good taking refuge there when it turns nasty...

Tue, 03/11/2014 - 20:31 | 4536477 Crisismode
Crisismode's picture



Lordy, will this never end?

What a total load of bullshit here.


What has ZH come to?


Tue, 03/11/2014 - 20:49 | 4536555 FEDbuster
FEDbuster's picture

Why am I now hungry for some small hamburgers on soft buns with grilled onions?

Tue, 03/11/2014 - 21:30 | 4536699 mjcOH1
mjcOH1's picture

"Recall that as we have repeatedly shown in the calendar of coming Chinese bond default, on March 31, a borrower named "Magic" (no comment) is set to default on a CNY196 million Trust."


Is Magic defaulting on debt to the Happy Lucky Golden Dragon?

Quick...by latest data, there are 93million people in-country with the surname 'Wang'.   Report to your local People's Kidney Donation center.

We appreciate your sacrifice for the People.

Surname Li......circle the People's kidney.   We will be in touch.

Tue, 03/11/2014 - 22:21 | 4536900 The Vineyard
The Vineyard's picture

China's not going anywhere.  Bitches.

Tue, 03/11/2014 - 16:23 | 4535610 MsCreant
MsCreant's picture

That is one FUGLY house, holy fuck hell. Kunstler would like that for his eyesore of the month feature he does. McCastle. Ewwwwwww!

Tue, 03/11/2014 - 16:31 | 4535633 chunga
chunga's picture

Rinda Green is arive!

Tue, 03/11/2014 - 21:52 | 4536788 Yes_Questions
Yes_Questions's picture



Hahahahahaha Points!

Wed, 03/12/2014 - 00:27 | 4537352 old naughty
old naughty's picture

would you like them houses?



Tue, 03/11/2014 - 16:57 | 4535723 giggler321
giggler321's picture

You've totally missed the good points, high ceilings, exposed beams - just what one wants when da'hanging judge presides over the bankers.

Tue, 03/11/2014 - 17:20 | 4535793 Sirius Wonderblast
Sirius Wonderblast's picture


It's a fair point you make, but will those paper thin walls support the weight?

Tue, 03/11/2014 - 17:30 | 4535819 MsCreant
MsCreant's picture

I stand corrected. Who cares how it looks if the whole place is being used as a gallows. And you can hose out the blood and other bodily fluids so easily with those floors.

Aw hell, now ya gone and done it. [Sniff, sniff]  Baby, it's beautiful. For me?

Tue, 03/11/2014 - 17:16 | 4535777 Ourrulersknowbest
Ourrulersknowbest's picture

Classy castle.is that AMERIKAN heritage chic.so becoming....

Tue, 03/11/2014 - 17:59 | 4535898 The Wisp
The Wisp's picture

is that an Apartment Complex ?

Tue, 03/11/2014 - 19:15 | 4536150 willwork4food
willwork4food's picture

Pretty cool on the inside though, but imagine the heating bill.

Tue, 03/11/2014 - 19:27 | 4536203 Jafo
Jafo's picture




Walter White and Jesse Pinkman could see a lot of potential in that place.

Tue, 03/11/2014 - 21:10 | 4536635 fleur de lis
fleur de lis's picture

It could be refitted for an indoor flea market, with lots of room for a food court. At least then it would be a place of honest work instead of a hideout for weirdo Freemasons.

Tue, 03/11/2014 - 21:31 | 4536704 willwork4food
willwork4food's picture

First time I've ever seen a bug like this at ZH. All 10 comments (or so) above belong in the castle post!!

Tue, 03/11/2014 - 18:07 | 4535914 Hobbleknee
Hobbleknee's picture

They could also blame Fukushima radiation on the nukes.

Tue, 03/11/2014 - 15:04 | 4535275 FEDbuster
FEDbuster's picture

If anyone is interested, I have this bridge in Brooklyn....

Tue, 03/11/2014 - 20:56 | 4536585 simplejustice
simplejustice's picture

Hey/ I own that stinking bridge!!!!!!!!

Tue, 03/11/2014 - 22:14 | 4536863 disabledvet
disabledvet's picture

says right here I've got title to it mister. and it's insured!

Tue, 03/11/2014 - 15:16 | 4535346 ebear
ebear's picture

"Remember the long lines to buy gold in China?"

The lines to buy gold plated tungsten are even longer!

Tue, 03/11/2014 - 14:41 | 4535032 TruthInSunshine
TruthInSunshine's picture

"CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders."

This lone, concisely written sentence, if the allegations contained therein are true (and they are likely to be so by a percentage of 99.99% or greater), should be interpreted by everyone with an IQ of 88 or greater that the toxic assets in China that have been "loaded up" in the last decade or so TOWER OVER the toxic assets (both in nominal AND REAL terms) that had built up and led to the 2008 crash that was demarcated by Lehman's collapse.

Take this sentence, and imagine it on scale that is multiplied by millions confines, regarding residential, industrial, commercial & office properties/buildings, plus other forms of collateral, INCLUDING CHATTEL PAPER, in China, which just so happens to be the home of 1.3'billion people with the fastest official GDP growth rate AND RECIPIENT OF THE GREATEST AMOUNT OF FOREIGN DIRECT INVESTMENT OF ANY NATION during the last two decades, as well as the nation that has printed the most fiat currency and non-regulated loans during the last 5 years.

Anyone who has yet to heed this FACT and yet fails to prepare for the inevitability of what is about to wash over the global economy deserves to drown in the great flood.

The aggregate amount of Chinese toxic assets are now EPIC and there is no way to deal with or contain their fallout in any manner that doesn't wreck the global economy given that China has soaked up tens of trillions upon trillions in multinational companies' capex over the last 19 years, to be the 50 year producer of the goods that their companies' business models depend on.

Tue, 03/11/2014 - 14:42 | 4535158 McMolotov
McMolotov's picture

One man's trash is another man's freedom fighter!

Tue, 03/11/2014 - 15:05 | 4535272 walküre
walküre's picture

This can't be contained and it cannot work its way through the system. Hence the ever greater confusion from the mouthpieces at the central banks. They all speak like cheaters caught between a rock and a hard place that they and only they can truly appreciate in all its severity and confinement.

The central bankers are stuck and coming to the end of their ropes. A full on collapse or a complete reset are coming closer with each passing day. Wars and rumors of wars, financial desolation, high unemployment, exessive lifestyles in the upper echelons and so on are all harbingers of a great paradigm shift.

Cash is King but not just any kind of cash. Needs to be either Dollars or Euros. Virtual cash in bank accounts is neither guaranteed nor protected, thus not qualified as collateral. Cash in hand will be collateral to buy whatever is not nailed down.

Unless of course, the central banks pull the nuclear option and physically print Dollars and Euros and distribute the money to citizens (account holders) around the world.

Either way, there will be tears. 2014 is the year it all comes crashing down. Life as you all knew it and all took for granted, has an expiry date. That date is sometime this year. I'm not shitting you.

Tue, 03/11/2014 - 15:37 | 4535414 Overfed
Overfed's picture

I remember saying as much about a year ago. I don't have any kind of cogent analysis, but I have the feeling that mid-2014 is when it gets really interesting.

Tue, 03/11/2014 - 22:17 | 4536878 disabledvet
disabledvet's picture

reports of billion dollar debit cards on Reuters.

Tue, 03/11/2014 - 16:05 | 4535545 RafterManFMJ
RafterManFMJ's picture

...you're my favorite turd.

Tue, 03/11/2014 - 16:24 | 4535615 Sirius Wonderblast
Sirius Wonderblast's picture

Euros? Spare me!

Tue, 03/11/2014 - 16:46 | 4535682 walküre
walküre's picture

Shillings and pence as well. Happy?

Tue, 03/11/2014 - 17:21 | 4535795 Sirius Wonderblast
Sirius Wonderblast's picture

Better, much much better.

Tue, 03/11/2014 - 16:22 | 4535605 Sirius Wonderblast
Sirius Wonderblast's picture

Anyone who ever placed the slightest faith in Chinese data needed their bumps felt.

Tue, 03/11/2014 - 18:05 | 4535909 MarsInScorpio
MarsInScorpio's picture



I always enjoy the power and clarity of your posts.


You're good.


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