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China's "Prelude To A Storm" As Record Private Bonds Mature

Tyler Durden's picture




 

With Shanghai having limited retail exposure to high-yield bonds, and the Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, it is no wonder that, as Bloomberg reports, analysts fear "a prelude to a storm." Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012. This week a 4th issuer has faced a "payment crisis" and while officials are trying to expand financing for small companies (which account for 70% of China's economy, with debt-to-equity ratios exceeding 200%, this is nothing but more ponzi. As Goldman warns, it appears China's Minsky Moment is drawing near (as the hangover from Q1's credit impulse kicks in).

China's small companies are fundamentally a disaster...

Number of Chinese firms whose liabilities are double their equity has surged since global financial crisis, suggesting more defaults may come.

 

Publicly traded non-financial corporates with debt-to-equity ratios exceeding 200% have jumped 68% since 2007

As Bloomberg reports,

The small companies that dominate China’s private market for high-yield bonds face rising default risks as their debt obligations soar to a record and economic growth slows to the lowest in more than two decades.

 

Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012, according to China Merchants Securities Co. The guarantor of debentures sold by Xuzhou Zhongsen Tonghao New Board Co. stepped in to help after the building materials producer based in the eastern province of Jiangsu missed a coupon payment in March.

 

Three other issuers have also faced “payment crises” this year, China Merchants said.

 

Premier Li Keqiang has sought to expand financing for small companies, which account for 70 percent of China’s economy, as expansion is set to cool to the slowest since 1990 at 7.4 percent this year, according to a Bloomberg survey. The nation’s bond clearing house last month suspended valuation of privately placed securities sold by an auto-parts exporter after it failed to clarify media reports regarding a possible default. A polyester maker with similar notes had a bankruptcy application accepted in March.

 

“The current risks exposed in the private-bond market are probably a prelude to a storm,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants

 

“There’s been improvement in only some sectors of the economy, not in all.”

*  *  *

As we noted previously, the problems are mounting and global in nature... (As Reuters reports,)

The Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, according to rating agency Standard & Poor's, underscoring the growing risk China's debt market is imposing on the global financial system.

 

 

Chinese corporate borrowers owed $14.2 trillion at the end of 2013 versus $13.1 trillion owed by U.S. corporations with the switch in rankings taking place a year earlier than it had expected, S&P said on Monday.

But that is not good news for the world's investors...

China, the world's second-largest economy is currently financing a quarter to a third of its corporate debt through its shadow banking sector and this had global implications, S&P said.

 

"This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," the agency said, estimating this at $4 trillion to $5 trillion. "With China's economy likely to grow at a nominal 10 percent per year over the next five years, this amount can only increase."

 

...

 

"As the world's second-largest national economy, any significant reverse for China's corporate sector could quickly spread to other countries."

As S&P sums up...

Cash flows and leverage at Chinese corporations are the worst among global peers, having deteriorated from being the best in 2009.

 

 

 

 

China's large and still-expanding contribution to global corporate debt, the higher financial risk is causing overall corporate risk to increase globally," the agency said.

 *  *  *

Goldman wonders if this is China's Minsky moment?

As a reference, the BIS paper estimated that a number of economies had similar or moderately lower debt service ratios (DSRs) when they were headed towards serious financial and economic crises. Examples include Finland (early 1990s), Korea (1997), the UK (2009), and the US (2009). This is one more data point in China that evokes the troubling thought of a hard landing.

 

However, we also agree that the actual DSR is probably lower. The assumption of an instalment-loan schedule implies that roll-over is not an option and all debt is fully repaid at maturity. This is clearly not the case in China. Otherwise, the 1% non-performing loan (NPL) ratio of the formal banking system would be simply impossible to explain - not to mention the zero default record kept by China’s domestic bond market or by the vast numbers of low-return infrastructure LGFVs.

 

Apparently, debt roll-over is not a good thing either; and, it cannot explain the increase in the debt burden. Hence, the logical conclusion has to be that a non-negligible share of the corporate sector is not able to repay either principal or interest, which qualifies as Ponzi financing in a Minsky framework. The mechanism that still holds the situation together is the state-backed formal banking system and its unspoken commitment to supporting local governments. We think this precarious equilibrium could last a bit longer but not much longer, particularly if the central government does nothing.

 

It is encouraging that the new leadership has so far tolerated slowing growth and largely resisted the temptation to resort to the 2009 approach [EXCEPT they just broke that rule] This at least has the merit of not making the problem any bigger than it already is. Furthermore, the set of new financial regulations targeting the shadow banking system and the bond market reflects the awareness of authorities of the level of financial risk. Nevertheless, we think more corporate defaults, rising NPLs, and some degree of credit crunch will still be unavoidable in the next three years, which lends weight to our below-consensus medium-term growth forecast.

*  *  *

Time for Xi to unleash some more QE-Lite or face the real consequence...

 

 

 

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Wed, 08/06/2014 - 22:48 | 5057228 junction
junction's picture

More bad news for the Manhattan condo market, who will buy overpriced apartments on the West Side?  Not the Chinese, anymore.

Wed, 08/06/2014 - 22:49 | 5057240 philipat
philipat's picture

Funny how the Squid never looks in its own back yard?

Wed, 08/06/2014 - 23:45 | 5057420 AldousHuxley
AldousHuxley's picture

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Hcx

 

30% devaluation of USD against RMB.

 

offshoring not so profitable anymore.

 

Boomers finding out their overinflated home prices buys less Chinese made goods these days.

 

 

 

 

Thu, 08/07/2014 - 00:04 | 5057467 Save_America1st
Save_America1st's picture

WATCH and LISTEN then PASS IT ON.  Excellent interview with Marine Colonel Pete Martino:  I See Something!

This is the TRUTH, "Folks"!!!

https://www.youtube.com/watch?v=OUTXnnVTInA

Wed, 08/06/2014 - 22:53 | 5057255 junction
junction's picture

Meanwhile, as the China economy starts imploding, the Guardian today reports the following in Iraq: 

40,000 Iraqis stranded on mountain as Isis jihadists threaten death. Members of minority Yazidi sect face slaughter if they go down and dehydration if they stay, while 130,000 fled to Kurdish north... --- This horrific news was pushed to the sidelines by Netanyahu's well timed invasion of Gaza. 
Wed, 08/06/2014 - 23:10 | 5057316 NoDebt
NoDebt's picture

I saw that story.  It was on Fox tonight.  So, not COMPLETELY ignored.

And I think the word you used to describe it- horrific- is about right.  You know there isn't a damned thing going to be done to help them.  By anyone.  Might as well head down the mountain and try to fight their way through before they get too weak.  They're dead anyway, just a matter of how they want to go out, I'm afraid.

Wed, 08/06/2014 - 23:17 | 5057342 Dr. Engali
Dr. Engali's picture

It's fucking sickening knowing those people are so fucked and our MSM will bury the story just to protect their idol. There's a special place in hell for those sick bastards. .

Thu, 08/07/2014 - 04:06 | 5057803 laomei
laomei's picture

This news is hilarious for one reason and one reason only.  The propaganda levels are massive on it.

 

No need to explain who the Yazidi are and why they are at risk... why? Because they are satanists.  Of course, on the rare occassion that their beliefs are explained and it's mentioned how it's all just a "big misunderstanding".  They gloss over the key point of:

Lucifer/Satan/Whoever defied "god" by refusing to obey.  And as such was cast down.  While the other desert religions condemn the act.  The Yazidi worship it.  So yes, they are in fact devil worshippers according to jews/christians/muslims.  Ya can't say "ISIS is on the verge of massacring a large satanic cult that you never even knew existsed before" though.  So ya gotta spin it.

Wed, 08/06/2014 - 22:49 | 5057229 LetThemEatRand
LetThemEatRand's picture

Do the Chinese speak Yiddish yet?  They will.  Or Widdish.   Yhatever.

Wed, 08/06/2014 - 22:59 | 5057262 tickhound
tickhound's picture

C'mon rand... You know better. Tell me how in the fuck an anthropological "white" yid passes himself as an unbias chinese political hack or tv pundit?

And don't "dats rayciss" my ass cuz I can't promise how I'd react.

Wed, 08/06/2014 - 22:59 | 5057264 Cognitive Dissonance
Cognitive Dissonance's picture

All they need to do is declare that 'non' performing loans are no longer 'non' and all is well for a few more quarters. We they have not yet begun to fight self deceive.

Just look to the USA for a primer on this subject. How many times over the last 6 years have the powers that be in the USA decided a default wasn't really a default. It takes one (a liar) to know one.....and to teach one.

Wed, 08/06/2014 - 23:05 | 5057295 hobopants
hobopants's picture

Looks good for the BRICS.

Wed, 08/06/2014 - 23:04 | 5057298 tickhound
tickhound's picture

I look at that "non-performing" loan chart and I recall the 2011-2012 (lows) mantra that China was busted.

Tylers, everyone is busted. The argument lay in which society is better prepared for the ramifications.

Wed, 08/06/2014 - 23:15 | 5057334 novictim
novictim's picture

"payment crisis"

How many investors wish they had worn their DEPENDS before reading that?

Wed, 08/06/2014 - 23:22 | 5057353 Dr. Engali
Dr. Engali's picture

Defaults, what a novel idea. If I dig deep into the recesses of my mind, I seem to recall that defaults are a necessary component of capitalism.

Thu, 08/07/2014 - 00:58 | 5057574 Cymore Duttz
Cymore Duttz's picture

"Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012.

$1 billion is a fairly small sum of money to trigger the fall of China.  Can't the government just make one of the banks take over the debt for some regulatory relief?  It would barely make an impact on a large bank.


Thu, 08/07/2014 - 03:11 | 5057738 teslaberry
teslaberry's picture

GDP is the most wildly manipulated statistic and essentially a bunch of horseshit and lies. 

anytime i see 'gdp' as the basis of an article, i simply stop reading and move on. 

Thu, 08/07/2014 - 04:00 | 5057799 laomei
laomei's picture

This seems impressive, until you actually stop, use your brain, and then put it into perspective.

The chart is in CNY because it makes the number look bigger.  We're talking under $100b of NPL based on $14.2t of debt.  That's less than 1%, that's about 0.7% actually.  NPL in the US is around $300b or so and likes to hand out at around 4%.  If you take into account writeoffs though, it's more like 8.5%.

 

So, 0.7% NPL versus 8.5%, a very simple basic comparison tells you that no, China's not in trouble.  What you are seeing here is bullshit out of america's favorite government propaganda mouthpiece Reuters.

Thu, 08/07/2014 - 06:56 | 5057919 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.

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

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