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China Admits First Official Local-Government Loan Default

Tyler Durden's picture


There has been a growing number of defaults since China first broke its non-payment cherry earlier this year. Names like Chaori Solar have "promised" to pay back the money they owe, only to falter on that promise mere months after a temporary reprieve. Wide-scale panic has for now been avoided by liquidity provision to banks (not shadow-banks) and mini-stimulus which many assumed was targeted at keeping the state-owned enterprises (SOEs) alive no matter what. That 'hope' all changed this weekend... As Bloomberg reports, Qilu Bank's annual report shows that Licheng district urban construction development company has not paid its loan interest..."To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan."

As Bloomberg reports,

Bank loans of a local-government urban construction development co. in eastern province of Shandong were in default by end-2013, according to the full-year earnings report of Qilu Bank released in April.


The urban construction development co. of Licheng district in Jinan city, capital of Shandong, owes interest of 6m yuan [which we find fascinatingly small - how bad are things if they cannot fund this?]


The development co. holds a 0.08% stake in Qilu Bank [indicative of the interconnectedness within China]

As Nomura economist Zhang Zhiwei wrote in note today that:

"To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan."

*  *  *

For those who need a refresh course on why the Chinese situation is rapidly going from bad to worse, read these several most recent comprehensive articles on the topic:

Bank of America warns further that a more confident government means the start of defaults...


With amazing speed in consolidating power in 2013, a more confident President Xi Jinping and team are expected to push for a wide range of reforms. 2014 will be the year for China seriously cleans up mounting local government and corporate debts which have been rapidly accumulated since late 2008. We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market

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Tue, 07/01/2014 - 08:50 | 4913357 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Can you say domino?

Tue, 07/01/2014 - 08:52 | 4913361 idea_hamster
idea_hamster's picture

What is the sound of one domino falling?

Guess we'll never know -- too many dominoes!

Tue, 07/01/2014 - 08:53 | 4913365 Headbanger
Headbanger's picture

I think it's moar like what's the sound of a single neutron splitting a plutonium atom in a bomb?

Tue, 07/01/2014 - 09:07 | 4913381 LetThemEatRand
LetThemEatRand's picture

Who knew the Pointer Sisters were so prescient?  Okay, I took some liberties:

"There's no more Fed money falling from the sky

'Cause a man named Yellen took my yield and robbed me blind

Someone recalled my brand new Chevrolet

And the rent is due, I got no place to stay


I'm just burning doin' the neutron dance

I'm just burning doin' the neutron dance"

Tue, 07/01/2014 - 14:49 | 4913536 Boris Alatovkrap
Boris Alatovkrap's picture

Mo ni go bai bai, wi kan no pei yu tu dei! A wei glei ta fu lu!

Wed, 07/09/2014 - 23:35 | 4942150 Late onset ADHD
Late onset ADHD's picture

I played on that record... still get residual checks from the union... I knew it was true then... what took you guys so long?...

Tue, 07/01/2014 - 08:53 | 4913364 knukles
knukles's picture

Hot Snot!
Betcha they've got nothing whatsoever to do with solar panels, construction, warehousing of commodities, commodities, clean water, environmental concers or demographics.

Booyah, bitchez

Tue, 07/01/2014 - 16:44 | 4915094 omniversling
omniversling's picture



How China Fooled The World - Documentary by BBC Robert Peston



China’s Monumental Ponzi: Here’s How It Unravels



Tue, 07/01/2014 - 09:20 | 4913409 Sudden Debt
Sudden Debt's picture

They call it mahjong...

Tue, 07/01/2014 - 08:54 | 4913362 MFL8240
MFL8240's picture

What do you think is bigger?  The demise and default of Detroit once the automotive capital of the world or this default?  And which on is all over the news?  I for one have had enough of this media circus in the USA and their games to keep this corrupt Kenyan shielded while we are falling apart by writing about issues that have no importance at all to the Average American working man or woman!

Tue, 07/01/2014 - 08:59 | 4913371 knukles
knukles's picture

Well, Premier Obatoes said the same thing that Premier Xiseeyounow about cleaning up the messes, so there is some non-dysfunctional parallel.
Then again, the folks in Detroit would likely say "Yangtzee go home" to any Chinee meddling at least until they get their full 100% allotment of South of the Border Immigrants under the new Don't Ask Don't Tell Lemme See Your ID, You Don't Have an ID, That's OK Immigration Reform and Subsidy Giveaway Program.

Vote Democratic, because there are no other parties, anyway.
Fucked without being tugged

Tue, 07/01/2014 - 09:03 | 4913374 MFL8240
MFL8240's picture

You are serious with this comment?

Tue, 07/01/2014 - 09:41 | 4913478 shovelhead
shovelhead's picture

Knucks is always serious.

Tue, 07/01/2014 - 11:28 | 4913887 knukles
knukles's picture

Did he really ask me that or am I hallucinating?
Momma warned those flashbacks would be a bitch

Tue, 07/01/2014 - 08:57 | 4913368 Jason T
Jason T's picture

nothing but a good clean wildfire to burn up the dead wood littered in China's economy .. should prove healthy long term.  

Tue, 07/01/2014 - 09:06 | 4913380 Son of Loki
Son of Loki's picture

"The 'local' Shangdong Gubmint officials could not be reached from their California homes."

Tue, 07/01/2014 - 09:10 | 4913386 AdvancingTime
AdvancingTime's picture

Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Like a plane on autopilot China continued in the direction it had been on.

Now China finds itself in a credit trap. For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.


Tue, 07/01/2014 - 09:22 | 4913414 Kina
Kina's picture

and yet the AUD is strengthening...

Tue, 07/01/2014 - 09:46 | 4913493 shovelhead
shovelhead's picture

China's plan is to ship Australians in to fill the Ghost cities.

They're looking for enough beer to entice them now.

Tue, 07/01/2014 - 09:44 | 4913491 CheapBastard
CheapBastard's picture

Ho Lee Phuk could not be reached for comment.

Tue, 07/01/2014 - 10:02 | 4913549 Rodders75
Rodders75's picture

Trying to find original Blmbg article. Does anyone have link?

Tue, 07/01/2014 - 10:43 | 4913693 TalkToLind
TalkToLind's picture

Does anyone remember when Germany couldn't get its gold back?  Why didn't that default get top billing in the MSM? 

Tue, 07/01/2014 - 21:11 | 4916059 IronForge
IronForge's picture

They'll overcome this.  

In due time, wage earners (white/blue collar) will be able to afford to live in those newly built ghost towns, raise tax revenue to cover the Bonds used to build the towns.

Even with the downturn, they can manage a high single digit growth rate.

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