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Kaisa Default Contagion: China's $245bn Corporate Bond Market "Is Too Complacent"
As we detailed previously, the first USD-denominated Chinese corporate bond default last week - of developer Kaisa Group - signals considerably deeper problems in China's economy as one manager noted, "everyone is rethinking risk right now." As Bloomberg reports, Chinese companies comprised 62% of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion and that huge (and illiquid) market "has been too complacent," according to one credit strategist who warned, investors would be “rational to adopt a cautious approach in view of the fact that anything can happen, anywhere, anytime. It would be irrational to continue thinking that after Kaisa none of the companies will see a similar fate."
Kaisa’s woes began late last year when the government in Shenzhen, less than 25 kilometers (15.5 miles) from Hong Kong, blocked approvals of its property sales and new projects in the city. It’s also being probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen who was taken into custody as part of a graft probe, two people familiar with the matter said last week, asking not to be named because the connection hasn’t been made public.
Kaisa missed an interest payment due Jan. 8 on its $500 million of 2020 bonds. The notes were sold to investors at par, or 100 cents on the dollar, in January 2013. In December, when some of Kaisa’s projects were blocked and key executives quit, the debentures lost 40.1 percent. They continued to fall in January, slumping to 29.901 cents on the dollar on Jan. 7.
That may signal deeper risks for China’s already fragile and corruption-prone property market, which according to World Bank estimates accounts for about 16 percent of economic growth.
Chinese companies comprised 62 percent of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion of the $392.5 billion total, according to data compiled by Bloomberg. BlackRock Inc., the world’s biggest asset manager, owned Kaisa’s 8.875 percent securities due 2018 and the ones the subject of the missed coupon payment, the 10.25 percent 2020s, its latest filing on Jan. 14 shows. Funds managed by JPMorgan Chase & Co., Fidelity Investment and ING Investment Management also held some of Kaisa’s debt at the end of October, according to filings.
“The market has been too complacent,” said Raymond Chia, the Singapore-based head of Asia credit research at Schroder Investment Management Ltd., which had $447.7 billion under management as of Sept. 30. Investors would be “rational to adopt a cautious approach in view of the fact that anything can happen, anywhere, anytime. It would be irrational to continue thinking that after Kaisa none of the companies will see a similar fate.”
Some of Kaisa’s Chinese creditors, meanwhile, have asked courts to freeze the company’s assets.
In a statement on Jan. 9, the developer said that “several bank accounts of the group” had been frozen.
...
It’s a reminder of the risks overseas bondholders face when Chinese companies run into trouble. China’s bankruptcy laws favor local creditors while offering fewer protections to foreign debt claims. Kaisa has a 30-day grace period to make its missed payment.
A bigger concern for global investors may be the hurt inflicted on the property market by President Xi Jinping’s effort to uproot government corruption. Bribery scandals have rocked the sector in the past and the prospect other developers may be targeted has hit bond and share prices almost unanimously.
“It’s definitely a concern among investors” that similar events could happen to other Chinese developers... “When sales are blocked at other developers, it fuels speculation of similar political risks,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc.
But fear is starting to spread through credit markets (even as Chinese stocks ignore fundamentals for now)...
Concern is mounting that increasing financial stress among builders could spill over into a broader credit crisis in China. New-home prices fell in 65 of the 70 cities monitored in December and were unchanged in four, the National Bureau of Statistics said in a statement yesterday. Shenzhen recorded higher prices, the first city to see an increase in four months.
Borrowing costs for many developers in the world’s second-largest economy have surged since Kaisa’s travails began. Yields on Chinese dollar-denominated speculative grade debt climbed to 12.38 percent on Jan. 16, a Bank of America Merrill Lynch index shows, the highest since June 2012. The junk debt has lost 5.7 percent in 2015, the worst start to a year on record.
And no matter how you try and ignore it...
Housing’s influence on China’s economy is pervasive, driving sales of everything from cement and steel to electrical appliances, furniture and cars. It’s contribution at home, and to global expansion, make it “the most important sector in the universe,” Jonathan Anderson, the former chief economist for emerging markets at UBS Group AG who now runs Beijing-based Emerging Advisors Group, wrote in a 2011 research note. Property is the main risk for China’s economy, Ma Jun, the chief economist at the People’s Bank of China, said in October.
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It's pretty clear which market is "complacent"...
Think about why (fundamentally) stocks are rallying - because everyone who can make their mark on a piece of paper believes China will fold, make the broad-based RRR cut they have said they will not and flood the world with credit again... so - riddle me this - why are the credit markets (that would directly benefit from said rate cut) not rallying?
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The authors have to be making some of this up. I mean, at some point, how can this crap keep happening, and the wheels don't come off?
My apology to the author, but it does seem unreal. And we keep hearing these " misses" , and then, nothing.
It's not a default, it's just de-dollarization of Chinese companies.
Everybody is de-dollarizing...but is this the way to do it? Maybe the PBoC wants to put some pressure on companies to get rid of the green asap?
"Too complacent"?
Who cares"
:-)
Oh man, you know we're headed for WWIII for sure... These goblins need a serious distraction in order to hide the fact that we are totally screwed...
It's not 'these goblins' who need anything, they're fine if they have a home, some food and a TV. It's global capital that's in need of a war or sth like it. China is the only hope, commie regime or whatever it may be.
I would like to order 2 shrimp rolls and a quart of chicken low mein and an order of general Tso chicken.
Where the f... am I? China has a $245 billion bond market. I must be dreaming.
Sounds like things are going just swimmingly, just need to believe in the state and its faultless decisions.......
Hey Round Eyes lend me a couple Million I will pay you back in 10 years.
Meh. "The yen is worthless/the yen is worth infinity."
The yen is a reserve currency...one of three with the euro and the dollar being the other two. How much Chinese debt is priced in yen? Or korean won?
This number seems ridiculously small compared to the size of the Chinese economy.
Please people read this Bloomturd piece not because it's good but because of the comments section!
Why Falling Prices Are Actually a Really Bad Thinghttp://www.bloomberg.com/news/2015-01-21/why-falling-prices-is-actually-...
Here is the highest rated comment and reply so far:
"This article may be a new low for Bloomberg. Falling prices are great for those in our society who behave responsibly (aka savers, etc.). Does suck for a debt-driven economy where people lever themselves up to buy stuff they don't need and then stay chained to a desk to pay for them.
Just Keynesian filth propping up a defunct and dying economic model. Trying to spur consumers to lever up and lose the economic freedom this country was founded on.
It will end, eventually."
In Reply:
"Thank God there's a rational person still in the room. Thank you for your comment"
China has the most stringent banking/loan/accounting standards in the world, and the financial reporting from companies both private and public exceed the standards set out by recognized international accounting organizations. Everything is going to be just fine over there.
Trust me.
The Central Bank of Russia is also complacent... with the US financial war on Russian people.
BAGGING THE CAT — KSENIA YUDAEVA, THE FIRST RUSSIAN CENTRAL BANK GOVERNOR TO BE SACKED IN SECRET
http://johnhelmer.net/?p=12533
when Li Kai Sheng returns to the mainland for property investment/development.........so will I.
His 'bunny' has a better nose than any of us have.
Bonus query: name the famous (though probably forgotten now) Wall Street insider case that led to a Goldie partner getting perp walked by fed AG (NY Southern District) Rudy Guilianni for insider trading. Goldie swore forever to torment Rudy as far and wide as they could for that humiliating move and led them to go full Clinton ala interviewer Rbt Rubin (remember...Committee to Save the World, only Assistant Secretary of Treasury with more power to speak than then Treasury Secretary Lloyd Bentsen, eventually Treasury Sec'y and then oracle of Citibank for Sandy) of the then nascent candidate from Arkansas..........
just a few correct names and/or year will do
Bunny's friend.
NY Times tries to get him a pardon from Obama.
http://opinionator.blogs.nytimes.com/2010/03/04/a-wall-street-witch-hunt/?_r=0
Centrally planned China has an advantage.
It can take an overall view and make strategic decisions.
It can let some companies fail to show investors they need to be sensible in what they invest in.
There is risk and the buyer needs to beware.
On the other hand it can ensure that there are not too many failures so the system collapses.
China's financial system is looking very robust.
Failures without catastrophe, unlike the West when Lehman was allowed to go under.
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