Second Chinese Bond Default On Deck

Tyler Durden's picture

It seems like it was only yesterday when the first official Chinese corporate default in history (there have been many other ones in the past but all were quickly masked by the government to avoid a panic), Chaori Solar, entered the history books. Now it's time for default number in the country's onshore bond market as Huatong Road & Bridge Group, a company whose businesses includ bridge and highway construction, real estate, coal, eco-friendly construction materials and agriculture-related projects, based in the northern province of Shanxi, said it may miss a 400 million yuan ($64.5 million) note payment due July 23, according to a statement to the Shanghai Clearing House yesterday.

As now traditionally happens in China, first the company is exposed for being a fraud (with its management admitting to its sins, never to be seen again) and then the corporate bondholders are left holding the bag. This time won't be any different: according to Bloomberg Chairman Wang Guorui is "assisting authorities with an official investigation." Wang was removed from the Chinese People’s Political Consultative Conference Shanxi Committee on July 9 for suspected violations of the law, according to an official statement and media report last week.

What happens next is clear: "It’s very likely the company will default,” said Xu Hanfei, a bond analyst at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “If it does, the event will have a big impact on investors’ risk sentiment."

Another staple of Chinese bond defaults: when reached for comment, the now shell of an insolvent company always refuses to make any comment:

An operator who answered the main line of Huatong Road today wouldn’t comment on the issues and declined to transfer the call to related people.

Also, it appears when it comes to default risk, China's rating agencies are about as ahead of the curve as their US peers: "China Lianhe Credit Rating Co. cut the company’s rating to BB+ from AA- to reflect the builder’s high default risks, according to a statement from the risk assessor today."

Some more on Huatong:

Huatong Road said in its statement yesterday that it’s exploring various channels to raise funds to pay off the one-year bond, according to the statement. It owes 429.2 million yuan in interest and principal by the due date, it said. The builder, which was set up in 1998, had 5.8 billion yuan of debt and 10.7 billion yuan of assets as of March 31, according to a separate statement in April on the Chinamoney website. It reported a profit of 62.7 million yuan for the first quarter.

We can't wait to find out just how many of those "billions" in assets have been rehypothecated countless times leading to pennies on the dollar, if any, recoveries for bondholders.

As for the big picture:

“The possible default of Huatong Road is another sign of increasing default risk among small and weak bond issuers in China as slower growth hits companies in sectors that are struggling with overcapacity and tougher financing conditions,” said Christopher Lee, Hong Kong-based managing director of corporate ratings at Standard & Poor’s. “Builders are vulnerable as the property downturn has curtailed construction investment which weakens their order book and revenues.”


“Possibility of government intervention is low. Since last year, the new administration has been taking a more market-oriented approach,” said Ivan Chung, Hong Kong-based senior vice president at Moody’s Investors Service. “Regulators realize that if they provide support by intervening, it will also create more moral hazards, which is not good for the market.”


Chung said more defaults may occur in sectors that are facing overcapacity, such as construction, steel and commodities.

Actually, the main reason why a deluge of defaults is inevitable, whether Beijing likes it or not, is that as we will report shortly, far from enaging in any deleveraging or "tapering" of credit injections, in the first quarter, Chinese banks saw the biggest increase in their assets in history! And since the bulk of these are in the form of loans going to already insolvent and materially impaired business, all China is doing now is throwing trillions in good money after bad. Which also means that in deciding to delay the Minsky unwind if only by a few months, China has just assured that when the collapse finally comes, it will be that much more acute.

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takeaction's picture

....Went and saw Planet of the APes last night...

takeaction's picture

Was editing my was supposed  to read...
 ....Went and saw Planet of the APes last about some serious undertones.  It is very interesting to me how movie makers insert things that "May be Coming" into these movies.  Just switch out "apes" to government soldiers and you have an exact scenario of what martial law looks like as people are rounded up and caged...and a great use of FEMA camps, and if you pay close attention to the signage in the destroyed civilization you will see on the barriers notifications like "Warning shots will not be fired" and "Deadly force is Authorized"....  Good movie.

Dr. Engali's picture

TPTB will always tell you what they are going to do to you before they do it. One just needs to be aware of the clues.

thataintnothin's picture

I did nazi see this coming.

disabledvet's picture

To be rich is to be glorious! To be bankrupt criminal!

NoDebt's picture

"with its management admitting to its sins, never to be seen again"

Is that never being seen again like killed/imprisoned or like Jon Corzine disappearing to his private island to chill out a while while the whole things blows over?

LetThemEatRand's picture

The worst Chinese offenders face serious punishment -- they are taken to Detroit.

Dubaibanker's picture

Just remember Detroit, Lehman and Stockton...and a USD 64.5m default seems like a blip on the road to doubling the global trade from USD 5 trillion currently to USD 10 trillion by 2020! Highest ever at 11.50% of global trade since colonial Britain in the 19th century! Stanchart prefers to call China the mega trader of the century.

Or the holder of the future reserve currency....
Dr. Engali's picture

Don't fret. I have it on high authority that this is all contained.

CheapBastard's picture

<< with its management admitting to its sins, never to be seen again >>


I think we've seen some of those 'missing execs' sipping plime wine in those $4 million houses in Cali.

buzzsaw99's picture

don't worry connected people will not suffer any loss

takeaction's picture

Why would downvote you..Hilarious.

HardlyZero's picture

The "Giant Debt Merger" may be just around the corner...Banking <--> Sovereign <--> Resources/Land/Commodities

The list of countries/states/cities is long and getting longer...Argentina, Austria, Bulgaria, Cyprus, Detroit, Portugal, ...

The next few weeks may see lots of bailout, bailin, nationalization.

RaceToTheBottom's picture

"I don't think the heavy stuff is going to come down for quite some time".