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On The Looming Wall Of Chinese Defaults, Restructuring Firm Warns "You Know It's Coming"
The news this week of China's largest corporate bankruptcy - Haixin Iron & Steel Group - amid crashing iron ore and steel prices was followed by analysts noting it "will be followed by others," as the major flaw of producers of iron ore, the most traded commodity after oil, is they tend to be "over-bullish." Distressed debt funds are starting to circle in preparation for what they expect to be a bloodbath as Bloomberg reports, bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management, "we've yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one." Most worryingly though, as KPMG points out, "when you see restructuring advisers getting hired by SOEs... you know it's coming."
“Instead of reorganization efforts conducted by local governments, this is an inevitable trend that China will take more ailing steel mills to the courts to protect creditors,” Xu said by phone from Beijing.
But apart from the entire Steel industry being on the verge of bankruptcy... China is doing great!
“There has to be a restructuring of the Chinese steel industry,” Eder said.
“The iron-ore producers are getting more and more aware that their growth expectations have to be redefined. There are enormous over-capacities and more is coming on stream. This will increase the pressure.”
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And as Bloomberg reports, as far as distressed debt in China - you ain't seen nothing yet!
Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management LLC.
The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders.
...
“They keep reporting such a low number for so many years, there’s only one way it can go -- up,” DAC founder Philip Groves said in an interview in Hong Kong yesterday. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.”
...
Oaktree Capital Group LLC, the world’s biggest distressed debt investor, joined with China Cinda in November 2013 to tap what it said were “unique opportunities” in the country’s real estate market.
“In China, we see a lot of opportunities out there, especially among Chinese banks,” Hanson Wong, Hong Kong-based chief executive officer of Belos Capital (Asia) Ltd. said in an interview. “They are facing some difficulty right now, they cannot keep extending their loans time and time again.”
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“When you see restructuring advisers getting hired by state-owned enterprises and Big Four accounting firms helping banks to get rid of distressed assets, you know it’s coming,” he said.
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Is it any wonder the PBOC cut rates? But of course - as we noted previously - this does nothing to cover the gaps in these companies overbloated balance sheets or extend their credit any further...
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Print race to the bottom...at least some cultures are investing in real assets.
RIPS
Defaults? That's so last century.
These days we socialize the losses on everyone. It works, 95% don't even realize what's happening...
If we can do it, the Chinese can also.
Don't be such a Krugman..
The harsh reality of what is coming around the corner is going to hit a lot of politicians and economists in the face like a sledgehammer.
That 95% don't realize,thats the really depressing part.
Real assets can be real-y confiscated by "the authorities" by whim or by decree.
Those who have their hand in the baking sheet will want their piece of your pie.
The best bet in this day and age, especially for my generation (mid-twenties) is to acquire marketable skills and to stay highly mobile, unburdened by too many material anchors.
Fire building, camo, fire and move, knots... those will be marketable skills for your generation. Welcome to the suck.
China is not printing to the bottom.
Contrary to what many experts think, China has a specific plan. They have a special team of ex-generals (or existing generals) who double up as Fund managers for the Government. They seek good projects around the world that benefitds China directly.
Generals in Oil companies are asked to seek higher profits overseas to subsidize lower oil prices at home.
Generals in Mining companies are asked to seek natural resosurces and consolidate commodity stocks.
Generals managing funds are asked to find projects to be given to Chinese construction and engineering companies.
China is doing very well indeed.
The real problem is with all those western corporations or western backed corporations setup in China. The western backed companies thought by employing 10,000s of cheap labor (extracted from the villages), they can make China Government help them. This was after all the trick used in ASEAN in 1998. Then, the ASEAN's new conglomerates grew by borrowing heavily from western Banks. When the whole ASEAN economy collapsed, the big conglomerates were bailed out with newly printed money that was used to pay off the debt with western Banks. The western Banks even created a special Consultative Group of Indonesia to manage the debt defaults in Indonesia.
Well, this time it will be different. China is not going to bail out western backed chinese companies. Chinese Government have been repeating that people should go back to their villages and forget the western dream. China is ready to face the large defaults and unemployment. China will help its citizens to prosecute every single one of those companies.
"Iceberg off the port bow!"
Having a dictatorial government adds another variable, especially since their elites are actively involved in promoting their particular little satraps. The newest leadership is Maoist leaning so we'll see a new set of purges soon with the usual new five year plan that will fix everything.
Wonton soup bitchez.
The same thing that Bill told Monica. "You know it's coming..."
And then it did.
Yeah. She wrote a book about it : how to suckseed in Washington. Very instructive LOL.
Going over the great wall
next 2 years will be not like last 2 years=)
Now you know why they already moved their family to europe and the states.
And how much of that money actually went to the companies and not to the cayman islands?
China will get a new revolution before America and Europe implode.
And what do rich westerners do? They move to china... Smart move...
I don't think that China go down first, they produce all things, and usa produce only paper and war
I see this tired argument on every China article, probably do to a lack of apprectiation for how intertwined the global economy is.
China is going to go boom like a giant fart, just like the rest of the world.
Picture a sinking life boat filled with countries, no land in sight, who gives a shit which is the last one to drown? Do you think they'll get a trophy or something?
Global economy, Global Crash.
"But they have industry! But they Have Gold!" They also have a billion peasants, an economy that is geared to produce cheap disposable goods for export, and a fragile political structure. Something tells me they will not be able to just calmly retool all of their factories, feed all of their people, and supress civil unrest when the shit hits the fan.
But hey, you guys keep dreaming. This proto nationalist cheerleading is the kind of simple-minded crap you see from bubba six pack at the football game.
Sure, China has big problems. But you're wrong to assume that a huge, well-developed manufacturing base, coupled with huge stocks of "good collateral" (i.e. gold), won't work greatly to its advantage.
And that gold will be drained fast as they have to import all the PHYSICAL crap that they have to (energy being top). Keep in mind that the markets for their goods are closing fast (as everyone contracts). It's amazing what a paltry 1% or 2% shift can do to the growth paradigm (+1% to -1% is huge).
It does them no good if civil unrest tears the country to pieces, why do you think their elite are buying homes and moving money over seas?
Odds are China will not be a unified whole after the coming shit storm, and most of that gold will be looted and taken out of country.
The elite are moving their wealth abroad largely beacuse they are theives, and it is much safer elsewhere. They also don't want to have to face Chinese justice, if it comes to that. They're not doing it because the country is about to be torn apart due to civil unrest.
Read up on Chinese history if you think that it is that simple. From one kingdom into many, and back again. I suspect it will be the same with the US and Europe.
Here is a really simple but decent overview of what I'm trying to articulate
Dynastic Cycle
China will not drown when the SHTF. They will simply purge their party of various factions as well as a few million non party members. Also allow 50 million to die of starvation.
No different than what they have done many times before.
Could the US survive a similar purge and massive death toll? Guess we will soon find out.
China make fake golf club and designer hand bag.
China's population has been firmly programmed with the Growth mantra. In the US and Europe most, though perhaps not understanding why, have felt the slow-down and are likely going to be less shocked when things really turn down.
As I've been saying for years now, there's only three countries that have a chance of riding the paradigm a ways in to the future: Canada, Russia, and, the US. Has everything to do with (physical) RESOURCES. China just doesn't have enough resources to keep their masses (who have been hoodwinked into believing they could all rise up to middle-class status) from storming the gates (though such would do nothing to actually cause resources that they don't have to magically appear). China is, and will continue to be, a wannabe. It will NOT be one of the "last standing."
Amen. A fact that is lost on many here is that factories aren't magical things which produce whatever you please out of thin air. They are highly specialized operations, using purpose built equipment to make a particular good. Once the need for that thing is gone, the factory is as useful as the giant ghost towns China is so fond of building.
In order to transition to an economy in which goods are consumed domestically, China would need to retool most of their industry. Then they would need a population wealthy enough to support that industry. This takes decades, not a few months.
On top of that, as you have pointed out, The country is for the most part resource poor, and dependent upon global supply lines.
I wouldn't be suprised to see China (and the US) break up into different parts after stuff falls apart. The Idea of a Chinese led global renaissance is a fantasy. Think Dark Ages.
It's refreshing to see that there are still adults around here (even if they wear hobo-pants! :-) )
Fuck you Seer, if someone does not agree with you and the hobo, it means they are not adults?
GFY!
Well you are certainly not making a great case to the contrary with that comment. But at least you had the balls to speak up instead of just mashing the red arrow button, props for that.
I don't think its as cut and dry as you two portait it. I agree with most of your statements. However to make the statement that seer made shows arrogance and a lack of intelligence. But I guess I'm just not an adult because I don't fully agree.
My comment was about seer's arrogance and judgement nothing else.
There are always other variables and since nobody is capable of predicting the future, much of what goes on down here is conjecture and guesswork.
If history is any guide, I doubt that any polictical entity will survive the coming crash intact. Nation states will likely fall apart and reorganize into new units, and the world will get alot smaller.
This seems logical to me given the elements in play. I have no problem hearing a logically sound argument to the contrary.
I imagine Seer wasn't attacking you personally, or even a well thought out position contrary to his, but like me is he is probably just tired of the mindless emotionally driven arguments that have become so prevelant on here.
Just because you want something to be true doesn't make it so, yet alot of people on here will ignore all facts and reason just to maintain a pet theory that agrees with their view of the world.
That being said, what is it you think I'm missing?
The resource angle, China and others are loading up on cheap oil and resources now, they are playing a long game. To assert that they will not survive does not take into account that they are loading up and are loading up big with gold a Global Currency in the end. That will allow them to continue to buy their way along. The ability for these other nations to survive is greater than you think. Do you think that a reduction in population of say 100 million in China will drastically change the nation? They could throw 200 million at the western world in a war and who is gonna be in worse shape in the end? While Canada and the US and Russia ( as Seer states) have resources it does not garantee that they will be the last ones standing.
I appreciate your point of view and it makes logical sense as a guesstimate, however there are way to many varibles to be so certain of the out come. Resources are people in a global war context, these third worlds have lots of resources, unless of course things go nuclear. See there are just to many variables to make solid determinations about who the "last ones standing will be".
The good thing about the Hedge is that there are many perspectives and ideas floated. Some based on emotion, some on logic, some because someone has skin in the game. Thats what makes this place great!
Again I agree with alot of what was stated by you and seer, I just don't go for the absolute assertations and the judgement of others because they believe something different.
Disclosure: I own no investments, or biased concerns for any other nation. I am a white middle-aged family guy trying to figure out the best path for my family by trying to understand what is happening globally and locally.
You're completely right that there are way too many variables to be certain of anything. I think that China is wise for accumulating gold and physical assets (it's what I'm doing), but I would still contend that it will probably not be enough.
You can see it in the anxeity of their leadership, moving themselves and their wealth outside of the country. The confidence that the China of today will still exist tomorrow is very, very shaky.
I'm personally not that big of a fan of Putin, but he said something, I think, that was very astute.
"I think in today's world, where everything is interconnected and everyone is dependent on one another in this way or another, we can, of course, inflict damage on one another, but this will be mutually harmful. They should think about that, too."
He sees what alot of people on here miss, the end of globalization means the end of the world that globalization created. There are no winners, and painful and dramatic change lies ahead for every nation
That's why I find the nationalism on here so funny you know? What does it matter which country is better prepared, when in fact by the very nature of the problem, none of them can be prepared? To quote The Road "even if you knew what to do, you wouldn't know what to do..."
I think you're right that are alot of Wild Cards on how this could play out, but personally I believe the evidence thus far points to the scenerio I laid out above. I would make a wager with you, but I don't think it's a bet I'd want to win...
US economy -- 17 T +
Chinese imports 400 B +
Share of US economy spent on cheap Chinese crap -- 2.35% of US GDP
China economy -- 9.2 T +
US imports -- 100 B +
Share of Chinese economy spent on US goods that CANNOT BE MANUFACTURED IN CHINA, which is the only stuff allowed to be imported -- 1.1 % of China GDP
When you look at Chinese revolutions and rebellions throughout history...neither North America nor Europe have never experienced that level of destruction (and that includes both world wars).
It's not as simple as that. There's 7+ BILLION people on the planet, all vying for resources, on a planet that's got WAY more armaments than in days-of-yore.
Wait until electric grids start failing. I don't even want to try and speculate how it unfolds from there...
Yep, when you read through their history some of the rebellions and uprisings are mind boggling as far as scale and violence goes. Just one example from the Taiping Rebellion.
"With no reliable census at the time, estimates are necessarily based on projections, but the most widely cited sources put the total number of deaths during the 15 years of the rebellion at about 20–30 million civilians and soldiers.[4] [13] Most of the deaths were attributed to plague and famine. At the Third Battle of Nanking in 1864, more than 100,000 were killed in three days."
Compare that to the American civil war where the losses were around one million.
If I was a Chinese oligarch I would be moving to Canada with all my looted wealth too.
Perspective using population numbers for 1864:
China - 369 million (http://civilwarhome.com/population1860.htm)
US - 33 million (http://civilwarhome.com/population1860.htm)
So, based on these China's deaths were at least double (US Civil War x 2 [or 4]).
OH oh ... some slack RATS are gonna suck the pipe
Sum Ting Wong
defaults happen all the time. China has big over capacity, YEAP. But nearly all analyst including the above have ZERO coverage of their current developments both internally as well as pan Asia and most importantly Eurasia. In the short to medium term I see some sectors having the need to be rebalanced and in some cases large liquidations, but I do not agree that its anything like US/Europe/Japan. I travel alot and I do business in alot of these places and China is far and way the most dynamic and if you notice their developments of renewing cities as well as rebalancing through repositioning their trade priorities as well as routes, you see a totally different picture to what was valid in the OLD SINO/US/EURO trade architecture.
Yes, there will be alot more bankruptcies. liquidations etc. They aren't afraid of letting things die, unlike the new trend in the Wests TBTF!
These analysts have half eye shut/blind as they do not following the rebuilding via the BRICS/Russia/SCO etc.
"In the short to medium term I see some sectors having the need to be rebalanced"
Rebalanced to WHAT?
FACT: all countries cycle through a rise, increasing production via increased energy inputs/demands, then, as they age they start dropping off while continuing to consume (for as long as they can) energy (in the later stages it's for personal comfort, whereas early on it was for production). GO ahead,. take a look at statistics and demographics, it's 100% accurate.
PEAK EXPORTS. Remember this term. More and more energy exporting countries will be utilizing a higher percentage of their energy locally, reducing that available on the open markets, and that which makes it out on to the open market will carry higher and higher prices/costs.
A country cannot grow without exports that exceed their imports. Those countries that import from China will be increasingly shifting higher percentages of their expenditures toward energy: exception is energy exporters, but here again this is a bit tenuous (as noted above).
The master of this chess game is, and this should be no surprise to anyone, Russia. China is way out of league here.
Everyone thinks China is arming up for a Pacific confrontation. They could just as easily turn west and try to take the oil/gas for themselves.
"They aren't afraid of letting things die"
Huh ? Have you been looking at anything over there ? The PBOC and governments all over China are propping up their buddies in every way imaginable - from loan rollovers to cheaper money to more loans to ...the mind boggles.
What you really meant to say, I'm sure, is that the Chinese government won't let their friends fail. The average citizen can take it on the chin.
The world is very overdue for a correction to the mean.
Some serious pain ahead for 90% of the Sheeples who still think the party will never end.
The good news is that none of them have any money to lose.
The bad news is that the rest of us will soon be joining them in that club.
So,maybe the Chinese will need all the trillions back that are financing the U.S. debt.That is already happening.Next,try to buy up as many gold and silver mining companies as you can and buy up interest in the rest through the stock markets.Pull the plug when you've got about 30-50,000 metric tonnes of bullion saved up.That should do it,then back your currency with gold.
The danger is Western industy and financial and banking exposure in China. Not import exports.
"They can't restructure their loans forever". If they keep lowering rates, why not? Default? What default? Playbook!
Their incentive to lie, cheat and steal is slightly deferred by the threat of firing squad. Bring your money and your kids to the land of the free! We honor bankers here!