Here's Why The Market Is Shrugging At TBE's "Promise" Not To Default In July

Tyler Durden's picture

The "good" news this evening is that Baoding Tianwei Baobian Electric Co (TBE), the company which as recently as two days ago was rumored to be the second "imminent" Chinese corporate bond default which sent copper to multi year lows, has issued a statement that it will not default on its upcoming interest payment (due July 11th - so how the delisted company is convinced it will have enough cash four months from now is a mustery). The "bad" news is that markets don't care. There is a slight whiff of positivity in Copper futures but aside from that, weakness continues in China's corporate bond and stock market. Simply put, the market gets it - this is no longer about the next idiosyncratic bond (or trust) to default; this is about Xi's renewed confidence in efforts to 'clean up' the mounting local government and corporate debts and shrink the shadow-banking bubble. This is systemic, and the markets know it.



Copper was excited momentarily...

TBE statement: (link)

Co. will pay bond interest for due July 2014 on time, according to a statement to the Shanghai stock exchange.

So to be clear, TBE is promising that in 4 months it will pay interest on a bond that it currently has zero liquiidty to pay, is losing money, and is in an industry that the government has specifically targeted for 'normalization'...

BofA explains why is it not a big piece of news in China?

To the Mainland China media, the delisting of TBE bonds is not a big piece of news, in our view, because TBE was already in a law suit on its other debt, and the “new energy” sector has been in deep trouble anyway (as we have seen with Wuxi Suntech and Chaori). TBE is in the business of making power transmission equipment, but in recent years has heavily invested in the ill-fated new energy sector which has resulted in two straight years of losses with the losses in 2013 surging to RMB5.2bn. TBE’s Shanghai Stock Exchange listed bond was issued in 2011, with principal at RMB1.6bn, a 5.75% yield and 7-year tenor. TBE’s stock price has already fallen by 15% this year. TBE’s controlling shareholder is Tianwei Group, which is a central-government owned company.


We do see a significant rise in bond and trust loan defaults We believe the chance of corporate bond and trust loan defaults will rise significantly in 2014 as a more confident President Xi Jinping and Premier Li Keqiang will aim to seriously clean up mounting local government and corporate debts.

As Li himself noted,

Though Mr Li said that he could not possibly "want to see" defaults in financial products, he added that "sometimes certain individual cases of such defaults are hardly avoidable".

As a gentle reminder (from our very detailed coverage of the China bubble about to burst), the bubble is gigantic (as Marc Faber would say) and there are many more debt maturities coming up...

From November 2012, The Chinese Credit Bubble - Full Frontal:



Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.


Finally, what everyone learned over the past month, is that as the two massive, and unresolvable forces, come to a head, the first cracks in the facade are starting to appear as first one then another shadow-banking Trust product failed and had to be bailed out in the last minute.

However, as we showed again last week, the default party in China is only just beginning as Trust failures in the coming months are set to accelerate at a breakneck pace.

So as Moody's noted:

Analysts see more such defaults in the coming months in sectors with overcapacity, such as steel and mining, as crackdowns on careless loans continue. "The lack of intervention is consistent with the central Chinese government's adoption of more market-oriented policies, which include increased tolerance for corporate bond defaults, as it reforms the country's financial markets," Moody's said in a commentary after the default.

In conclusion, one default here or there now is no longer relevant as the first crack in the damn has been made. Risk will be re-priced... confidence has been broken that money is free and 10% yields are riskless... finally, as we previously noted in great detail, here are the next steps...

The question, however, in addition to "why", is whether the Fed also agrees with BofA's stunningly frank, and quite disturbing conclusion, perhaps finally realizing that aside from the US, the biggest house of cards that would topple once the "flow"-free emperor is exposed in his nudity, is that of the world's largest "growth" (and credit) dynamo of the past two decades - China. Because, as noted above, if Lehman's collapse was bad, a deflationary collapse brought on by Chinese hard landing coupled with a full unwind of the global carry trade, would be disastrous and send the world into a depression the likes of which have never before been seen.

Finally, for those who want the blow by blow, here is BofA's tentative take of what the preliminary steps of the next global great depression will look like:

If we do experience a sizable default, the knee-jerk market reaction will be cash hoarding since it will strike as a big surprise. Thus, we expect the repo rate to rise first, while the long term government bond would get bid due to risk aversion flows.


However, what follows will be quite uncertain, aside from PBoC injecting liquidity and easing monetary policy to help short term rate come down. It has been proven again and again the Chinese government will get involved and be proactive. The bond market reaction will be different depending on the government solution.

Alas, at that point, not even the world's largest bazooka will be enough.

At this point one should conclude that reality - through massive, unprecedented liquidity injections - has been deferred long enough. It is time to let the markets finally return to some semblance of uncentrally-planned normalcy: there is a reason why nature abhors a vacuum. Even if it means the eruption of the very painful grand reset, washing away decades of capital misallocation, lies and ill-gotten wealth, so very overdue.

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Crash Overide's picture

Dr. Copper has a history.

National Blessing's picture

I don't forsee another crash.  This money printing seems to be working.  Food stamps for everybody.  Yipeeeeee.  Bitches.

TruthInSunshine's picture

Watch & learn then.

The Chinese Premiere, who is speaking on behalf of the the entire Chinese Government and all of its adjunct entities (including the PBoC), is not going to make such a major, broad & incredibly important statement (that China won't bail out troubled companies, bonds & other credit instruments, and investors), unless this was already 100% decided upon already by the Grand Committee.

It's a fait accompli. The die are cast.

This was a policy decision made probably BOTH because 1) it's the only true way to sweep away the sepsis and clear the deck for future real growth and 2) the amount of resources that would have to be dedicated, shifted and "consumed" in bailing out what will be a tsunami of defaults that cascade higher and higher would stretch the Chinese monetary & fiscal resources to the point of breaking, and do even worse damage to the structure of the Chinese economy long term.

Moral hazard has come back into play, and oddly enough, it's going to be re-discovered by "investors" via the "Communist" Chinese. How ironic, no? If only America and the EU could be so free market oriented.

Now, just wait to see the extent of the fallout.

old naughty's picture

Watch and learn then.

Didn't horseface said 9 months ago peace would come to Palestine?

What about search going over to Indian Ocean, it's been a week...Probably take to July, or later?

Where'd they get the money in July to pay, hummmmmmmm. 

prains's picture


don't you think the chinese are playing a game conveniently timed to squeeze american nuts? this "wave" of defaults all seems well too timed to coincide with the Ukranian debacle. the paper tiger has it all under control when they want to be and all out of control when they want to be.....

TruthInSunshine's picture

I have no idea as to how Ukraine is factoring into this, but I think what's occurring and will continue to cascade in China was inevitable regardless of other geopolitical factors.

China has a severely diseased economy that must shed & clear its bad debts, and if this process doesn't take place sooner rather than later, they risk getting sucked into a black hole from whence they won't be able to escape.

They've been increasingly telegraphing this outline for some time, but went all in with it publicly and officially today.

prains's picture

I'm reading it as more of a veiled threat, that if things don't go Putin's way in Ukraine, all of a sudden a chaotic economic crisis will break out as (we the chinese) are now for some reason "unable" to control the tsunami of defaults.

tickhound's picture

I'm not saying you're wrong... Or that it can't or won't go down in ways you've laid out/been laying out. But I have trouble seeing the severity of these issues when compared to other areas of the world.

China is a(the) production end of the worldwide consumption growth model. Resistant to market shocks in ways we wish we could be. A population more passive towards subsidy, growth manipulation even (one-child policy). Paper-over bad debt and artificial debt growth is policy worldwide... And since confidence is REALLY the issue, it is the west that's been shaken. Confidence in China's role on the world stage is only growing... No matter how unworthy the economic models instituted by the west prove to be.

China's populace is used to an entirely different standard of living. 18 year olds get Visa card apps here cuz we need consumption growth wherever we can squeeze it. 'Visa' debt is new over there. (IMO, this is where Schiff may one day get his 'china begins to consume' forecast). Tap that when needed.

The bulk of subsidy to the world economy has been toward the consumption end... Our end.

And should the debt wage consume growth model go bust, which it will eventually, (and I can tell you first hand alternative models are being studied in dc), I see the greater realignments occurring on this end, not that end.

SHRAGS's picture

And should the debt wage consume growth model go bust, which it will eventually, (and I can tell you first hand alternative models are being studied in dc), I see the greater realignments occurring on this end, not that end.


Can you elaborate on the other models being considered?



tickhound's picture

First look at what Lagarde and various status quacks say for easy public consumption...

It's worth the read, if for no other reason just to see any solutions offered. And the solutions are grow even faster to offset labor destruction, to re-educate towards 'outclassing' technology LOL, and 'policy intervention' (subsidize consumption moar).

A model change to me, should start with trying to replace human labor and lose any need for 'money' but I digress. Nothing like that is happening around me. No real 'model' change, but serious introspection on how we've defined labor and wage.

Keep in mind even these alterations assume we still consume and borrow... less fast. What I do know is that labor is being redefined. 'Working 24-7' should be taken literally in a world of google glasses and 'hats'. Collusion of 'policy' and corporations apply a wage. Whether disability made easy, or food subsidy, or tax break, or debt forgiveness, or wage... Its wage. Forget paid to click, get paid to think. After all, you own it. You own all your patterns, thoughts, nightmares, wants, and nut busts... And every facial expression that goes with them.

Tech now is seriously rationed. I have clients in the defense dept, Raytheon, who know what our capabilities are... And the figure out is what to do with all these navy seamen. This is ray Charles to a lot of these people. This economy should be wrecked just by its obsolescence.

And btw... Most here think everything is some cabal or EVIL people. Most of these policy makers and Deloitte and douches and speech writers (pelosi's was a client) and shit are pretty bright people who truly DONT GET IT. They solve problems within the corridors of the options presented... With the choices they think exist. They are propagandIZED, they aren't the propaganda. They BELIEVE this shit and don't know any other way.

sunaJ's picture

Keep on shinin'!

Good post.


chindit13's picture

I am not so sure the "Chinese Premiere is speaking on behalf of the entire Chinese Government". There are factions in two areas, one between the CP and the PBoC (the former seeks maximum employment so as not to rile the masses, while the latter wants to tame inflation...the first requires easy money, the second tight money), and the other is where factions exist within the CP itself. With the downfall of Bo Xilai, Bo's supporters have tried to go after other factions within the CP in order to defend what they were losing. Xi is more closely aligned with the opposing faction, not what was Bo Xilai's. Once that is settled, the winner can then fight it out with the PBoC.

The flood of money departing China over the last year says many in the elite class are not confident that their faction will win, and that perhaps even the entire CP---no matter the faction---is up against it.

Perhaps subsequent events will lay to rest the bizarre myth that "Chinese are long term thinkers".

Quantum Nucleonics's picture

The return of the zombie bonds.  Does the company make the next interest payment before it takes a headshot.

dow jones 20000's picture

my birthday is in July... total financial collapse would be the best gift any good ZH'er could ask for

Dimons jock's picture

So we should expect some heavy us treasury buying shortly in exchange for not fucking with long duck dongs bonds?
Uh bullish?

DormRoom's picture

China is an authoritative regime.  They likely know what companies pose systemic risk, and monitor obsessively. It's doubtful there will be a hard landing.  The US & Europe have managed a 'beautiful deleveraging' over the past 5 years (at the expense of Gen Y).  So too will China.


The  G7 have learned from the great financial crises to be vigilante of systemic risk.  China will not permit a hard landing.  Neither will the other G7 countries.

dow jones 20000's picture

coming from an enlightened member of Gen Y:

we're all too busy distracting ourselves with facebook and shit to actually do anything about it... but once we figure out the degree to which we've been fucked with (I hope) we'll see a thousand burning Kievs all over North America. 

dow jones 20000's picture

For clarification: I truly hope there is a peaceful resolution to all of this but from an empirical standpoint I just don't know if that's a possible or realistic outcome. I do not hope for or plan on working towards "a thousand burning Kievs all over North America" but I believe that may be the realistic outcome of the downfall of the current paradigm.

I'm just happy that at 19 I'm cynical and informed enough to be long .223 cartriges, booze, gold, land, pioneer skills and a degree in politics with specialization in geopolitics and political economy. I'm short pretty much everything my parents believe in.

Haager's picture

Hmm. In Europe, increase in NPLs is usually bullish. Must be because ECB pays them to square.

Shyysiryxius's picture

Important and ONTopic -

And so it begins; the "Economic Depression" that so many naive investors had thought Bernanke & his equally incompetent and/or malicious central reserve fractional fiat bankers saved us from gets an official renewal shot across the bow in the form of this warning:

Phillip Inman economics correspondent
The Guardian, Thursday 13 March 2014 16.29 EDT

"China's Li Keqiang warns investors to prepare for wave of bankruptcies
World's second largest economy is facing 'serious challenges' and many companies with high debts are being forced to the wall"

Theta_Burn's picture

Everything coming to a head all at once.

Scapegoats all lined up...

Critical thinking non existant..

Fire one..


Theta_Burn's picture

Nice one..and yes indeed

When those fuckers fire up the whole planet will buzz...


slightlyskeptical's picture

1. They suddenly have the liquidity to pay the interest

1. Copper prices plunged

2. They sold a boatload of copper cheap in order to make the payment


chump666's picture

China has hedged massively on iron ore with stockpiles, they're going drive down their own prices which will smash ore lower.  Should drag Copper down too, defaults or not.  Chinese funds were building short Copper futures late last year.  It's still on, even a whiff of default will collapse the price.

Australia will get it in the neck...bad.

disabledvet's picture


Erin Burnett...ready to start taking it off for the cam!
"Just keep those ones and zeros rolling people. DON'T LOOK AT THE CAMERA!"

Dollarmedes's picture

Heh. I'm getting a kick out of the breathless coverage this minor story is getting. Meanwhile, the global economy is going over the edge.

q99x2's picture

Chinese Xi should throw in the towel and let the Western globalists banksters take over his country.

Then everyone can go to college and have a good time.

Ban KKiller's picture

China already has all the "excellent" accountants from Wall Street!  

Crash date August 12, 2014!

Harry Dong's picture

Cayman islands is the safe haven for Chinese's elite, why? Perhaps sum ting Wong can tell us why?

holdbuysell's picture

What's the English to Chinese translation for:

"Baoding Tianwei Baobian Electric Co is not Bear"

I'm quite sure it's been said, which means it's a done deal.

And the Mexican Peso will not be devalued.

And subprime is contained.

Et al.


TheRideNeverEnds's picture

nothing creating a few trillion more dollars cant fix