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Insolvent Chinese Construction Company Gets Last Minute Bailout, Avoids China's Second Bond Default
It seems like it was only yesterday when China lied it would open up its bond market to real price discovery and unleash a wave of corporate defaults resulting from epic capital misallocation and central planning, consequences be damned. Well, one company, one single solitary company did default in March, and after the new bond issuance market ground to a halt, and coupled with the swoon in Chinese housing, the consequences were promptly undamned and every single company that was set for bankruptcy was bailed out in the last moment as once again China re-evaluated its options and decided to keep the status quo (the other being the so-called deleveraging and debt issuance slowdown which, paradoxically, resulted in the biggest increase in bank assets in history in Q1).
Which brings us to Huatong Road & Bridge Group, a company which as we reported last week was set to be the second public default in China's massive interbank bond market after Chaori (and after countless others which would have gone tits up had it not been for government interventions), and technically the first principal default in China history (Chaori was only an interest payment default). Things seemed virtually assured after Huatong chief executive Wang Guorui was publicly dismissed from Shanxi province's Chinese People's Political Consultative Conference, a political advisory body, on suspicion he broke the law, according to a statement posted on the provincial government's website on July 10.
Well, those keeping track and hoping the second default would finally hit have to hold their breath again after yet another last minute bailout has now made a complete mockery of China's "deliberate" intentions to clear up the rot plaguing its bond market. As Reuters reports, Huatong avoided a "landmark bond default at the last minute on Wednesday, raising enough funds to pay off both principal and interest on a 400 million yuan ($64.51 million) bond."
Who bailed it out? Why the same government which continues to say one thing and do something totally different.
The people said there was aggressive fundraising by Huatong Road & Bridge Group Co Ltd, as well as collection of its accounts payable by a local government in Shanxi province, where the firm is based.
Danny Chen, chief credit officer at China Lianhe Ratings, which downgraded Huatong in response to that announcement, said while he could not comment absent a fresh official announcement, he expected the company to make some statement on Wednesday.
A bond trader at a commercial bank in Shanghai said news that Huatong had obtained enough funds to avoid default "isn't much of a surprise to the market".
"People had expected the local government and company to try to avoid default given the impact," he said. "You may argue that in the long run, one day such defaults will happen, but not for now."
Precisely: one day the full impact of delaying the inevitable will no longer be avoidable, and when that day comes run, because it will be the end of China's central planning regime. But for now, just enjoy the present, be hopeful and not cynical.
Amusingly it wasn't just the government that stepped in this time: it was also the underwriters of the bond, who know quite well that once the dominoes start tumbling, it is all over and the bank can i) kiss any hopes of generating interest income goobye and ii) will finally have to mark those trillions in bad loans on China's bank books to something resembling reality, in the process starting the biggest credit crisis the world has ever seen (there are $25 trillion in Chinese bank loans, or said otherwise: Lehman was a walk in the park).
Huatong's fundraising effort was aided by the bond's primary underwriters, China Guangfa Bank and Guotai Junan Securities, which sent teams to Huatong to ensure information disclosure and facilitate recovery. Bond analysts said that while yields on Huatong's bond last week surged to nearly 15 percent from 6 percent, the market priced in a delay in payment, not a permanent default, as Huatong largely appeared to have short-term liquidity problems.
So yes, it was a group effort:
Huatong had previously told media it expected strong support from the local government in rounding up overdue accounts receivable and in delaying collection of outstanding loans coming due.
Analysts said many receivables involved other local government bodies that had hired Huatong to build real estate projects, then delayed payment due to their own financial difficulties.
Reuters' conclusion:
The analysts also said avoidance of a default is unlikely to reassure China's fixed income markets, which have seen steadily rising rates for short-term debt as demands from cash-strapped companies for money continue.
"No market can sustain a status quo of no-defaults," a trader at an Asian bank in Shanghai said. "Chinese authorities will find one day that they cannot support all money-losing companies."
Yes, one day. But not today. For now let's all pretend that China is growing, that the global economy is recovering and the the system is stable. As for inconvenient reminders such as this one, that none of the above is true, well... see above about hope vs cynicism.
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another example of capitalist utopia [/sarcasm]
Remeber, this future reserve currency ZH keeps promoting is still fiat and has all the same problems as the dollar (if not more).
Humanity will learn soon enough why time and time again humans have tried fiat then went back to using real money, regardless of century, nation, culture or race.
Whew, that was close. With a second data point somebody might have drawn a trend line.
Very typical.
Politburo will bail out all firms connected to them and let others collapse methodically, without causing hyper massive protests in large cities.
But, they will continue to shut down thousands of smaller ones, otherwise if all of them get bailed out, food inflation will go out of hand.
Agreed. Anything and everything deemed 'important' in china will be bailed out.
Spent a lot of time working in China and the Government there is all powerful. And everyone there knows it.
The Government of China would never let a company failure happen that would hurt China and it's image. They will be bailed out and then moves will be made quietly behind the scenes to punish (use your imagination) those involved. The Government will likely use this to actually increase it's power over the corporate elite there as these actions will serve as very loud warning to anyone who operates a medium to large size company.
This will likely get messy as it all unravels though (as these things do). Then perhaps look for a sharp increase in distractions for internal consumption (terrorism anyone?).
We'll see how it all unfolds but China will likely do everything it can to contain it and maintain it's face.
Politburo will bail out all firms connected to them and let others collapse methodically, without causing hyper massive protests in large cities.
Is this any differnt than what happens here in the good ole' US?
It's a bit more nuanced than that.
The central govt wants failed firms to fail, the local govts(provincial or the municipal level) don't want their local industries to fail and wants to bail them out.
It only looks to be the same govt from outside because we think a one-party state means all the branches and levels of the Chinese govt are on the same page, the reality is actually the opposite.
Just imagine, a communist state, or any politician, for that matter, saying one thing and doing another. I'm shocked, Shocked, I tell you!
Yes. They had to do it to "save the system". It is just the continuation of corruption.
I wonder what can happen or when they will not be able to stop it. The Lehman Bros. lessons have been learned as they continue to fleece the ultimate underwriters...us.
Figured it out yet?
None of these Chink companies turn a dime in profit except maybe FoxxCon, this is how most of them work
Borrow $1,000,000,000 to produce goods worth $500,000,000 that is then sold in the US to destroy American companies that cant compete,
Owner then shoves $100,000,000 in his own pockets,
Short $400,000,000? Borrow another $1,000,000,000 from idiot American banks to keep merry go round going.
Works even better by resecuritizng the same pile of cotton over and over again.
California RE just went up again.
Hey all, I've started a website that offers free technical and fundamental analysis on the precious metals complex. I just posted a new analysis on the Gold/Silver Ratio which suggests immense upside for silver.
http://www.goldsqueeze.com/technical-analysis
I am also posting relevant news from around the web. Please take a look and bookmark if you like what you see. My intent is certainly not to compete with ZH. I'm really doing this for education purposes (to get the word out) and because I enjoy doing it.
...you only have your fuckin casino because socialism and fascism made that possible. [/nicky santoro]
the utter chaos that will follow when defaults grow beyond control will be pure entertainment
another communist regime goes down the toilet
definitely an orville redenbacher moment!!!
I bet someone was connected to one of the Leaders...a son or daughter...its a family thing in China...you got connections..you get bailed out...
Maybe China can bail out the Kurds next, as they seem to be a little short on cash. Literately.
From The Saker,
22nd July: The Government of Iraqi Kurdistan has decided to pay its employees in USD, as it does not have enough of Iraqi currency.
Hank Paulson always had a thing for China (and climate change). I'm certain he appreciates that immunity from prosecution is a non issue in China. "Capitalism" apparently alive and well in the Middle Kingdom.
On the way to dominating global trade and becoming the largest trader nation in the world, with 25% of global trade on the planet by 2020, some hiccups are to be expected in China. Currently, China is just 11.5% of global trade, highest of any nation ever, since colonial Britain, 200 years ago.
https://www.sc.com/en/resources/global-en/pdf/Research/2014/Global_trade...
China's total trade will rise from USD 4 trillion in 2010 to USD 10 trillion by 2020. In 2013, it was USD 5 trillion.
http://www.lse.ac.uk/ideas/publications/reports/pdf/sr012/li.pdf
Fortunately, the hiccups are not the size of Lehman, Stockton, Detroit or the coming Flint bankrutcy or the 2007/2008 subprime crisis or the 1973 oil crisis or the 2000 Tech crisis.....
Ahhh, hiccups. Bwaaaaah!
China is probably the biggest house of cards out there because everything and everyone has levered up REAL raw materials.
That is fine if all you do is trade paper, but if you are looking at doubling your output in 7 years (10% YoY compounded growth) someone is gonna need all that collateral if they intend to actually make anything.
The world is slowing down and China is looking at 10% YoY?
Pull the other one.
pods
China has grown 10% pa since 1979's revolution. That is a fact! You may not want to believe it, but that's cool....
Have a look here: China's Economic Rise: History, Trends, Challenges
China has brought 500m people out of poverty in the last 2-3 decades as well, which also is a fact.
That is why China buys parts of IBM, Motorola, Heathrow airport, Volvo, Peugeot, Smithfield Foods, AMC theatres, Nexen etc while helping almost every single country including US (by buying their bonds) and still has more to give to any country whom IMF or World Bank dont wish to help by giving them yuan to pay the US led FI's back, with interest. just look at Africa, how most countries are flourishing as soon as US left their shores and China took it's place. All this is done with real money which is as real as when it is in our pockets or in the pockets of the Chinese.
China also is the world's largest producer of gold and cement. China is largest buyer of cars as well as steel. China is largest holder of FX reserves while every other nation is in debt. China has 4 out of Top 8 banks globally. China has 7 out of Top 10 ports globally while in 2000 they had none.
All of this cannot be created out of debt or from thin air ala the Federal Reserve. They have saved hard for over 3 decades and are now enjoying the fruits of their hard work.
And yes, they do have hiccups, because they have achieved all of the above while they had 1.3bn population.
Just imagine, what chaos has USA caused with just 300m people, if US had 1.3bn I wonder what would have happened? Crisis would have occured in 1929 and never recovered or just nuclear bombed themselves? :)
It's wishful thinking that China will just go away when they have barely started rising!
Think 2025 and let me know if you will still be beating about China's debt, which by the way is the most productive debt ever, which foreigners like all the 6bn people of us are vying to own through their yuan.
And China does not allow foreigners to invest onshore, buy their currency, buy their real estate or stocks. Imagine what will happen if they allowed all that especially knowing what US has been doing through Snowden, FATCA, decline in employment and R&D, no infra spending, withdrawing banks from global locations, being thrown out of Russia and China and Middle East et al and laying baseless allegations against Chinese people over spying and currency manipulation etc and accelerating their departure back to China.
I am sure those Chinese numbers are rock solid.
Here is the deal. China made a deal to become the world's manufacturer because they have a gigantic labor supply and do not care about where the byproducts of production go.
Those are two costs that allow them to use wage arbitrage to capture the world's manufacturing.
China has put forth that saved capital?
What capital? The US Treasury bonds that are created out of thin air and bought with the same created out of thin air FRNs? Ain't no capital there, only debt.
The whole world is a ponzi. China is just dumb enough to end up holding all the cards (debt notes) when the game ends.
And to boot they are dumping their toxic waste into the one thing that is in shorter supply than oil. Their fresh water.
That is fine if you think China can continue to do things cheaper by pissing on the rug. Eventually they are going to have to buy toilets and new rugs.
pods
Why are we all holding our breath waiting for the next shoe to drop. We're in No Shoedrop Zone to infinity. I'm a fucking idiot cause there is no way I thought this charade would run this long, but I'm mistaken...it can go on forever, that is as clear as the nose on your face. BTW. My wife is confused. she just doesn't understand why every day at 3:30 I think it's Tuesday.
Eve of Destruction
I'd say get it while you can, yeah
Honey, get it while you can
Hey hey, get it while you can
sez Janis
Woopee! we're all gonna die!
Step 1: Create INC.
Step 2: borrow large sums of money
Step 3: threaten to default
Step 4: government gives you money to pay bondholders
Step 5: Profit!!
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 into the shadow banking sector and towards housing, this has 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.
http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html
I looked up the word "default" and it is no longer a word. Double Plus Good.
I wouldn't expect anything less from China.
Crony-capitalists and their political minions are similar to roaches.
They are not limited to only the US and Europe, infestations occur where there are easy pickings and corrupt governance.
Human parasites.
If the report is to be believed, a big "if", the problem was late payment of monies owed, and the local government stepped in to collect those receivables. They also apparently helped negotiate a delay in payables owed by the company. If that's true, it wasn't really a bailout by Western standards.
I was quiet surprised when i found this on yahoo
no link to russian government in the plane downing,
http://news.yahoo.com/us-no-russian-govt-plane-downing-212220665--politi...
Zerohedge you are being too slow
Johnmack.... nope.... ZH wellcovered this as it broke. You missed it.
$64.5M is pocket change. Of course, they covered it. Yawn.