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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BlindMonkey's picture

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

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

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.

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.

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?

 

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.

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.

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.

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.

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.

Groundhog Day's picture

So buy the dip then?

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

Gamma735's picture

Can we vote to throw California out of the Union?

knukles's picture

How about substituting CA with DC?

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...

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!

 

Seer's picture

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

Clowns to the left of me jokers to the right.

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.

dontknowcrapabouteconomy's picture

really. 

where the fuck are we going with this?

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

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"

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.

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?

booboo's picture

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

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.

BlindMonkey's picture

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

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. 

Jafo's picture

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

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.

Seer's picture

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

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 !

BlindMonkey's picture

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

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.

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.

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.

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...

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).

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.

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?

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...

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.

thestarl's picture

Their coal is mostly shit quality 

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.

 

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.

Seer's picture

What's a barrel of oil going for?

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

Seer's picture

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