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China's Liquidity Crunch Slams Importers Who Are Defaulting, Reneging On Deals

Tyler Durden's picture




 

Over the past month, we have explained in detail not only how the Chinese credit collapse and massive carry unwind will look like in theory, but shown various instances how, in practice, the world's greatest debt bubble is starting to burst, resulting not only in the first ever corporate default but also in the bursting of the associated biggest ever housing bubble. One thing we have not commented on was how actual trade pathways - far more critical to offshore counterparts than merely credit tremors within the mainland - would be impacted once the nascent liquidity crisis spread.

Today, we find the answer courtesy of the WSJ which reports that for the first time in the current Chinese liquidity crunch, Chinese importers, for now just those of soybeans and rubber but soon most other products, "are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world's second-biggest economy."

While apologists of China's collapse have been quick to point out that China's credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private - corporate - debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as the offshore supply chain is Ice 9'ed.

More from the WSJ:

Most purchases are private, with little data on the volumes affected, but traders at Asian trading firms say they are seeing a sharp rise in canceled contracts this year while other buyers are demanding heavy discounts.

 

The U.S. Department of Agriculture confirmed that China has canceled orders for 517,000 metric tons of soybeans, used to make cooking oil, and compares to imports of 63.4 million tons last year. South American soybean contracts have also been canceled because of weak demand, says trade journal Oil World.

 

The cancellations are a big worry for the commodity markets as exporters around the world had relied for years on China's insatiable appetite for a wide range of raw ingredients. But now as jitters rise over the health of the economy, the fallout is rippling through into agricultural commodities, just weeks after the price of copper and iron ore tumbled on worries they had been used in risky Chinese financing deals.

For now the impacted importers are those dealing purely with commodity products, such as rubber. The problem is that once one importer defaults on a contract, suddenly counterparty risk regarding all of China (and certainly those using commodities on Letters of Credit, recall China Commodity Funding Deals) soars, forcing other offshore exporters to collapse liquidity terms when dealing with Chinese buyers, and demand payment on truncated timeframes, resulting in a closed loop of liquidity evaporation from trade networks, which in turn forces local banks to step in and provide liquidity at precisely the time when banks are suddenly far more selective who they issue loans to.

Natural rubber, mostly grown in Southeast Asia and used to make products ranging from tires to latex gloves, is also getting hit as some buyers from China refuse to honor existing agreements, or look for ways to negotiate discounts. Two large Asian rubber producers, who asked not to be named, said Chinese buyers had defaulted on them.

 

Traders say buyers are trying to ask for discounts, citing reasons such as cargo arriving a few days late and claims about poor quality or contamination, said Bundit Kerdvongbundit, vice president of Von Bundit Co., Thailand's second-largest natural rubber producer. The contracts are already signed, but Chinese importers "refuse to take cargo or pay unless they get discounts."

Surely someone hedged though - it is not as if everyone was naive enough to sign major trade deal assuming the status quo would continue indefinitely despite China's well-documented recent liquidity concerns. Well, maybe...

One comfort is that most companies trading with China have taken some sort of safeguards after widespread defaults in the wake of the 2008 global financial crisis, like asking for deposits, said Benson Lim, chief operating officer and head of global rubber trading at R1 International.

.. But, not really:

However, "the business is so competitive that not all sellers are taking deposits, so they are hard-hit when buyers default," he added.

The result: collapsing commodity prices as the biggest marginal buyer suddenly goes bidless, if not an outright seller.

Rubber prices have dropped more than 20% since the beginning of the year, due to worries over China's slowing economy and a global surplus of the commodity. Many sellers who bought at high prices are unwilling to sell at a loss, pushing up stocks at the port of Qingdao to near-record levels recently. Stockpiles in some other commodities like soybeans and iron ore are also high as buyers hang on.

Which means that after having stuck their head in the sand for years, and ignoring just the possibility of precisely this outcome, suddenly everyone is scrambling and asking how this could have possibly happened:

Commodities are particularly sensitive to the health of the economy given the their wide-ranging use. But with China this month recording its first ever corporate bond default, and fears over a property developer, investors are growing jittery as Beijing tries to clamp down on years of reckless lending.

 

"The number one problem is weak demand from the credit tightening last year and real estate which has a direct or pass through effect on all of this activity," said Shanghai-based Citi Research commodities strategist Ivan Szpakowski.

There is one other tangent: what is the common link between rubber and soybeans? We explained precisely this ten days ago in "What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?" Yup - as briefly noted above, these are all the commodities that serve as conduits in China's numerous Commodity Funding Deals. Only no more.

Which means that far form merely crushing exporters who suddenly are dealing with Chinese importers who have torn apart contracts, obviously with no recourse, suddenly China's entire "hot money" laundering infrastructure (which as explained over the weekend, has gold performing an even greater role than copper) is about to collapse.

And when the counterparties of China's hundreds of billions in CCFDs decide to also get out of Dodge and unwind these deals (amounting to hundreds of billions in notional), only to find the underlying commodity has not only been re-re-rehypotecated countless times and has been sold, then there is truly no way of saying what happens next.

 

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Thu, 03/27/2014 - 22:45 | 4601360 BlindMonkey
BlindMonkey's picture

So much for the Aussie economic miracle. They will have to quit mining and go back to buggering the 'roos.

Thu, 03/27/2014 - 22:49 | 4601369 knukles
knukles's picture

Dude, that's razzzist!

 

PS  Watch CNBS's Ozzie broadcasts for a while and pretty soon you come to understand why those men actually do look like alcoholic mentally infimed criminal types.  There are reasons for stereotypes

Thu, 03/27/2014 - 23:00 | 4601405 cifo
Fri, 03/28/2014 - 00:14 | 4601541 Muddy1
Muddy1's picture

There is no mention of oil and gas in the commodity list.  If China is slowing down, Putin may not be able to count on them to buy the oil aand gas that will no longer be flowing to Europe.

Fri, 03/28/2014 - 01:26 | 4601630 Dollarmedes
Dollarmedes's picture

I had the same thought. Some stats:

As of 2010, the EU imported about 420 billion cubic meters of natural gas in total. About 1/3 came from Russia, for a total of about 140 Bcm. I assume this number is generally stable.

As of 2010, China imported about 30 Bcm...but the trend was going up, so let's say it has doubled since then. That would still only be 60 Bcm, or about 43% of the total demand of the EU.

 

Putin won't be able to get by on just China's demand, especially if China has a major downturn.

Fri, 03/28/2014 - 02:23 | 4601670 Squid-puppets a...
Squid-puppets a-go-go's picture

you think the full 140 to europe will be lost? prolly not. I think some nations would have to break their nato obligations rather than lose russian gas. You think sweden can find western replacements for 100% of its gas?

 

Fri, 03/28/2014 - 09:50 | 4602247 Dollarmedes
Dollarmedes's picture

I agree, which is why I said "Putin won't be able to get by on just China's demand, especially if China has a major downturn."

Assuming he wants revenue to just remain the same, he'll have to have *some* European contracts. Specifically, at least 57% of the current levels.

Fri, 03/28/2014 - 18:55 | 4604170 Muddy1
Muddy1's picture

In breaking their NATO obligations Putin will have succeeded in a masterful divide and conquer strategy, Europe will be divided, new alliances will be formed, and the fundamental transformation will continue.  Although I won't give Obummer any credit for the destruction of NATO alliances, he will have successfully stumbled into the process.

Fri, 03/28/2014 - 02:27 | 4601675 Seer
Seer's picture

Pretty clear why the world is hotting up, eh?

Desperation time as the perpetual-growth game comes crashing down.

Russia has little choice other than pursue China's business, as the EU can demand all it wants, the ISSUE is PAYMENT, and the EU is rapidly blowing out, on target for collapse.  China, as can be seen, has peaked; however, it still has an iron-fisted govt and a few coins in its pockets, for a while at least.

Fri, 03/28/2014 - 03:27 | 4601712 Aussiekiwi
Aussiekiwi's picture

Bugger, suppose time to fuel the ute up again and throw the nets in the back, good thing I can eat them afterwards, now if I could only teach them to brew beer life would be perfect.

Fri, 03/28/2014 - 07:33 | 4601872 BandGap
BandGap's picture

It is disconcerting to ever believe this was an acceptable practice, this buggering of roos.

Very disturbing mental image. Shame on you, sir.

Thu, 03/27/2014 - 22:45 | 4601361 Groundhog Day
Groundhog Day's picture

So buy the dip then?

Thu, 03/27/2014 - 22:47 | 4601363 knukles
knukles's picture

"Oh come on, it doesn't matter to us, it's all contained in China.  Who cares?"
   -one of my California right wing nut job pals

"Who cares?  Did you see Krugman's latest article?  The bathtub's not full, yet.  We can just print more."
    - one of my California Progressive buds

 

But we sure gotta take care of them poor people in Crimea.
    - both my California pals

Thu, 03/27/2014 - 22:59 | 4601398 Gamma735
Gamma735's picture

Can we vote to throw California out of the Union?

Thu, 03/27/2014 - 23:01 | 4601409 knukles
knukles's picture

How about substituting CA with DC?

Thu, 03/27/2014 - 23:52 | 4601513 Troll Magnet
Troll Magnet's picture

As a CA resident, it would be a dream to see CA purge every single one of its statist parasites and secede from the union. I can only dream...

Fri, 03/28/2014 - 00:35 | 4601567 Unpopular Truth
Unpopular Truth's picture

As a CA resident I will probably be bailed out by you all who work for what you earn.

As a human being I am ashamed of it, but there is nothing I can do about it.

If we split into 6, at least my voice will be heard. But if you throw us out, I WILL UNDERSTAND!

 

Thu, 03/27/2014 - 23:00 | 4601402 Seer
Seer's picture

With all this insanity one starts to seriously consider going crazy...

Clowns to the left of me jokers to the right.

Fri, 03/28/2014 - 02:55 | 4601654 zhandax
zhandax's picture

Distraction for the young, denial for the old.  Is the ZH fermentation crew the only group able/willing to watch of all this shit without resorting to the crazy option?

On the lighter side, I haven't read Vonnegut for at least 30 years, so before thinking about it, I punched the term 'Ice 9'ed' into the search engine.  The first four results were for ICD-9 which is apparently the billing code for 'Impotence, organic origin'.  Either definition may apply.

Thu, 03/27/2014 - 23:00 | 4601403 Slave
Slave's picture

Nuff said.

Fri, 03/28/2014 - 00:46 | 4601583 dontknowcrapabo...
dontknowcrapabouteconomy's picture

really. 

where the fuck are we going with this?

the longer this whole charade lasts the more nervous i get.

Thu, 03/27/2014 - 22:47 | 4601370 booboo
booboo's picture

Exporters dealing with the Chinese with liquidity issues might as well be dealing with some nefarious character in the Star Wars Bar, "courts? what courts round eye"

Fri, 03/28/2014 - 03:01 | 4601698 SilverRhino
SilverRhino's picture

>>The contracts are already signed, but Chinese importers "refuse to take cargo or pay unless they get discounts."

That's because they are NOT honorable businessmen and will fuck and cheat you for a penny.   China, nice food, wouldnt dream of trying to do business with them.    There's a reason my mentor called them the Jews of the Orient.

Thu, 03/27/2014 - 22:48 | 4601374 BlindMonkey
BlindMonkey's picture

"Natural rubber, mostly grown in Southeast Asia and used to make products ranging from tires to latex gloves, is also getting hit as some buyers from China refuse to honor existing agreements, or look for ways to negotiate discounts. Two large Asian rubber producers, who asked not to be named, said Chinese buyers had defaulted on them."

Time to go short on latex condoms?

Thu, 03/27/2014 - 22:52 | 4601382 booboo
booboo's picture

Man rule #17 Never use short and condom in the same sentence.

Thu, 03/27/2014 - 22:56 | 4601389 knukles
knukles's picture

In the modern era of global warming, resource scarcity, water and food shortages, I'm doing my part by reusing my condoms by turn9ng them inside out, frequently.
Stick that up your arse, Al Gore.

Thu, 03/27/2014 - 22:59 | 4601399 BlindMonkey
BlindMonkey's picture

Down vote simply for the ewww factor. Damn....

Thu, 03/27/2014 - 23:33 | 4601428 Quus Ant
Quus Ant's picture

Condoms end up in the ocean eventually.  Wrapped snuggly over a bottlenose dolphin's head. 

On the other hand No dolphin ever died from coitus-interruptus. 

Fri, 03/28/2014 - 03:36 | 4601720 Jafo
Jafo's picture

The thought of it going up Al Gore's ass with your cock in it is quite amusing ;-)

Thu, 03/27/2014 - 22:58 | 4601395 BlindMonkey
BlindMonkey's picture

Do I get a pass if it short, condoms and Chinese in the same sentence?

We aren't talking latex export to Africa here.

Thu, 03/27/2014 - 23:06 | 4601422 knukles
knukles's picture

There be some truth in dat dere statement...

http://www.buzzfeed.com/jonny5/penis-size-chart-by-ethnicity-aub

Thu, 03/27/2014 - 23:01 | 4601411 Seer
Seer's picture

Man rule #33- never mention sex and blindness (what would be the need for condoms?).

Thu, 03/27/2014 - 23:17 | 4601453 Joenobody12
Joenobody12's picture

Time to go short on latex condoms? }

Go long ,you moron. They dont have the money to buy hte rubber to make more condom so the existing stock is going to get really expensive real soon.

By the way, Blindmonkey,  how did you get blind ? Didnt your mother told you if you keep doing it you will go blind. - Save a condom, go blind !

Thu, 03/27/2014 - 23:51 | 4601505 BlindMonkey
BlindMonkey's picture

Tragic case of STD. It involved mescaline and a 4 assed monkey on this island....

Fri, 03/28/2014 - 07:16 | 4601848 gmak
gmak's picture

Are you kidding? If they can't sell the stock, it has to be dumped at cheaper prices. there will be a temporary glut as no more is being sold to those who didn't pay. Go short rubber prices. condoms will still cost the same and the mfg'er will pocket the difference for those upper mgmt bonuses.

Thu, 03/27/2014 - 22:50 | 4601377 Judge Crater
Judge Crater's picture

China has marketplace problems while the United States will be facing liquidity problems, making payments on its massive national debt.  China's problems pale in the face of the economic problems the USA has, the result of the kleptocracy that rules America running the country like a giant Mafia bust-out operation.

Thu, 03/27/2014 - 23:08 | 4601427 Seer
Seer's picture

Um, no.

China is REALLY, REALLY fucked.  They've targeted impossible growth.  They don't have energy resources.  They are a huge exporting nation confronted with a contacting world: and if China sides with Russia? US markets will pretty much vanish.  Wipe away all the paper shit and China is dead.  The US, on the other hand, HAS resources (as does Canada and Russia).

China is Japan II, only bigger.

Thu, 03/27/2014 - 23:17 | 4601456 BlindMonkey
BlindMonkey's picture

The resources are in North America alright but... I doubt we could get out of our own way in order to exploit the resources. Legal battles over federal land would lock everything up for a long time.

Let's say for grins that we started mining rare earths again. How long would it take to get it out of the ground? Refining? Where would the finished products be produced? Lots more to it than simply saying that a given rock is in Utah somewhere...

Thu, 03/27/2014 - 23:47 | 4601506 Seer
Seer's picture

"I doubt we could get out of our own way in order to exploit the resources."

Let me clarify...

This will no longer be a big global exploitation and redistribution world.  EVERYONE will be much poorer (owing to scarcity and energy costs).  Rare earh metals and such are done, the iShit society is done.

Food, Shelter and Water.  This is where I am focusing as pertains resources.  Farm land.  Water (I'm fat here).  Shelter: no more housing bubbles, but when the efforts can be justified then there's timber.

Again, China is fucked.  EVERYTHING that I have been predicting is unfolding as I said it would.  I'm no blind-monkey (and I've been around here for years, not 4 weeks).

Fri, 03/28/2014 - 08:03 | 4601922 ebear
ebear's picture

"Let's say for grins that we started mining rare earths again."

 

http://www.molycorp.com/about-us/our-facilities/molycorp-mountain-pass/

Thu, 03/27/2014 - 23:42 | 4601500 garypaul
garypaul's picture

Holy fuck, Tyler should kick this Seer guy off of ZH. China's coal reserves are possibly the largest in the world! Also, rare earth metals, etc. etc.

Thu, 03/27/2014 - 23:50 | 4601511 Seer
Seer's picture

I didn't down vote you (I'll let others do it).

China’s Ore to Coal Imports Reach Records as Demand Gains

http://www.bloomberg.com/news/2014-01-10/china-s-ore-to-coal-imports-rea...

Why would one need to import large amounts of something if it has it?

Fri, 03/28/2014 - 02:29 | 4601677 JustUsChickensHere
JustUsChickensHere's picture

Well  ... perhaps they are keeping their reserves untouched, and using all those FRN's to use up other peoples resources first.

It is what the USA has done for years with oil...

Fri, 03/28/2014 - 08:14 | 4601947 ebear
ebear's picture

Most of China's coal reserves are in the north and northwest, far from their major industrial centers which are on the coast.  Cheaper to import by sea than transport overland, at least until their rail system improves, I suppose.

Fri, 03/28/2014 - 10:06 | 4602302 thestarl
thestarl's picture

Their coal is mostly shit quality 

Fri, 03/28/2014 - 03:25 | 4601709 hobopants
hobopants's picture

Optimism bias rears it's ugly head again. This isn't a competition, there is no "first place" this is a global time bomb with global consequences and plenty of pain for all. China's coal and ipod dirt isn't going to save them anymore than our oil reserves are going to magically save us.

 

Thu, 03/27/2014 - 23:02 | 4601416 pursueliberty
pursueliberty's picture

So, could we see a decrease back in tires prices to pre 08 levels? 

 

Tires went up a metric shit ton in cost from 09-12.  I'm paying a solid 60% more for 10 ply truck and trailer tires.

Thu, 03/27/2014 - 23:09 | 4601431 Seer
Seer's picture

What's a barrel of oil going for?

Thu, 03/27/2014 - 23:09 | 4601425 AdvancingTime
AdvancingTime's picture

With China awash in overcapacity and several years of growing debt loads concern is rising the whole unstable pyramid is about to come crashing down. This could bring China and possibly the global economy with it. The economic efficiency of credit has begun to collapse in China and the unwinding of China’s giant credit spree could be vary painful. More on China's credit trap below.

http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html

Thu, 03/27/2014 - 23:11 | 4601437 Seer
Seer's picture

The global economy is fracturing (see "Ukraine").  It was always going to happen: can't have perpetual growth.

Thu, 03/27/2014 - 23:11 | 4601435 deflator
deflator's picture

This is what federal reserve bankers would call, "bad inflation".

Thu, 03/27/2014 - 23:18 | 4601458 weburke
weburke's picture

well, what happens is that the glorious cornacopia of products that fill shelves in all the stores is at its peak. Spend a few days just appreciating the glut of products for all the niches. We are at the tip top. Change to less for more is coming.

Thu, 03/27/2014 - 23:23 | 4601473 Handful of Dust
Handful of Dust's picture

No Tickee No Shirtee.

Thu, 03/27/2014 - 23:47 | 4601507 adr
adr's picture

Doesn't fucking matter. There could be the mother of all supply loads with producers begging people to take them, Wall Street will still bid the contracts higher.

The end game is that nobody will be able to do business because the likes of Goldman Sachs will have made it impossible to do so as long as they exist.

If the middle man that adds no value can't make his cut he'll make sure nobody else can. We are almost there. Most companies can't make money selling thier product through retail channels, which is why the only way they can make money is off selling stock. 

You end up with corporations that make nothing, employ nobody, and are profitless yet still worth billions. What a wonderful system.

Fri, 03/28/2014 - 00:00 | 4601523 Seer
Seer's picture

It's all about credit drying up.  This is in response to clear declines in growth (with people broke how are they going to be able to buy MOAR shit?).

The logical shift is toward essential things (fundamentals).  iShit and ghost cities are NOT in this category...

Thu, 03/27/2014 - 23:51 | 4601512 ChargingHandle
ChargingHandle's picture

Unfortunately it seems fundamentals and bloated balance sheets have zero correlation to equity prices in this flat economy. 

Fri, 03/28/2014 - 00:17 | 4601549 kito
kito's picture

Hey look the hang seng is up big!!! Where is the fire?

Fri, 03/28/2014 - 01:00 | 4601605 Carl Popper
Carl Popper's picture

Just wait until the liquidity crunch hits their gold imports and they start puking up their gold on the international market as it slowly sinks to 900 something. 

 

 

I would love to buy gold at 900 again 

Fri, 03/28/2014 - 03:16 | 4601703 Aussiekiwi
Aussiekiwi's picture

Yes, you and everyone else in the world, which is why it will never get to 900 again.

Fri, 03/28/2014 - 02:17 | 4601663 Fred123
Fred123's picture

Don't worry, the Chinese are so much smarter than the rest of the world and they have thought this thru and have decided it is not a problem.

Fri, 03/28/2014 - 02:34 | 4601679 Seer
Seer's picture

Yes, only THEY have managed to figure out how to make the perpetual growth model work on a finite planet!

The moment they let Kissinger step foot on their soil they were doomed.  Should have studied more world history: Greeks, Trojan Horses...

Fri, 03/28/2014 - 03:15 | 4601701 Aussiekiwi
Aussiekiwi's picture

They just need to print more money, right? , works everywhere else in every situation, ask the FED.

Fri, 03/28/2014 - 03:50 | 4601728 Ban KKiller
Ban KKiller's picture

At least the air might clean up when the factories shut.

The pollution there is  insane, no, really. Can't see one block some days. 

7.5, 6.5, and now growth at what?

Fri, 03/28/2014 - 06:06 | 4601791 Pinche Caballero
Pinche Caballero's picture

Every day this slow-motion shit storm in the making drags on is another day during which to do something useful for one's self.

Seems appropriate to post these links this morning based on Seer's and others comments above with regards to energy availability/ costs. Two comprehensive sites for do-it-your-self handyman types interested in generating and/or conserving energy at home.

http://otherpower.com/

http://www.builditsolar.com/Projects/Projects.htm

Reading through the comments on ZH several days ago, there were questions with regards to batteries, storage banks, etc. see below link

Http://otherpower.com/otherpower_battery.html

Fri, 03/28/2014 - 10:25 | 4602372 ella
ella's picture

Surprise, surprise, surprise, the shadow banking system profits from their creation of money through credit bubbles and ultimately crashes.  Credit creates speculation and asset inflation which they call appreciation.  Profits are made as the credit bubble grows.  A few get out early, the rest get burned.  Governments that once allowed the shadow banking gravy train see the threat to economic stability and attempt to control the bubble.   Usually, this only occurs after the inevitable bust of some large company as it threatens the shadow system's makers of credit and debt.  Central bankers try to mop up the disaster and destruction ensues.  Why not eliminate or seriously control shadow banking to prevent economic disaster?  Let's start by eliminating bailouts for the shadow banking system and prohibit derivative contracts.    

Do NOT follow this link or you will be banned from the site!