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The Defaults Continue In China As Duck Producer Sinks
On Monday, in “China May Double Down On Debt Swap As ABS Issuance Stumbles”, we reiterated the important point that China is effectively pursuing a number of competing policy goals in an attempt to deleverage and re-leverage simultaneously.
The effort to rein in shadow banking (deleveraging) has led to slowing credit creation just as economic growth decelerates, a decisively undesirable scenario that multiple policy rate cuts (re-leveraging) have so far proven ineffective at ameliorating. Meanwhile, a push to make it easier for banks to securitize loans and thus free up their balance sheets for more lending (re-leveraging) has been complicated by rising NPLs and Beijing’s apparent willingness to let the free market play more of a role in deciding which companies default (deleveraging).
Over the past several months we’ve seen at least three examples of Chinese defaults including Baoding Tianwei Group, a subsidiary of state-owned parent China South Industries, and while creditors have asked China South to guarantee the notes, the mere possibility that Beijing will begin to take a more hands-off approach when it comes to propping up borrowers (especially state-owned borrowers) has some lenders nervous. This was on full display on Monday when duck processing company Zhongao defaulted citing banks’ unwillingness to roll its debt.
FT has the story:
A profitable Chinese duck processing company has defaulted on its debts after banks refused to roll over its loans — in a sign of lenders’ wariness over refinancings as China’s economy slows.
Until recently, Chinese banks have been reluctant to write off big debts, preferring to keep businesses alive by rolling over their loans. But privately owned Zhongao has cited banks’ tighter lending policies as a reason why it lacked the funds to repay Rmb282m ($45m) in principal and interest despite turning a profit last year.
It has now defaulted on debt from 13 banks, and warned it may not be able to repay Rmb200m in bonds maturing on June 12.
If it fails to pay its bondholders, it will add to a series of recent defaults in China’s bond market where — until recently — many investors had assumed the government would not allow them to take losses.
Underscoring how much things have changed, Zhongao was actually a profitable company, unlike Baoding Tianwei, for instance, which incurred large losses in 2014.
Unlike other defaulters, however, Zhongao remains profitable, according to its latest financial statements. It made a net profit of Rmb388m in the first nine months of 2014, up 42 per cent over a year earlier. In late April, though, the company said the release of its fourth-quarter 2014 and first-quarter 2015 results would be delayed.
In the past, Beijing would pressure banks to roll over bad debt in an effort to paper over problems and keep NPLs artificially suppressed at the country’s large lenders and indeed, that practice looks likely to continue especially for local governments who will enjoy lenient treatment should they run into trouble on any new debt incurred through the use of LGFV financing for ongoing projects.
It’s now a different story for private companies however. Here’s FT again:
But analysts point out that non-state entities such as Zhongao have less clout than state-owned enterprises and local governments to demand that banks roll over their loans. Last month, Chinese authorities ordered banks to roll over loans to local government financing vehicles, even if borrowers were unable to repay principal or interest.
Non-performing loans at Chinese banks reached their highest level in more than five years by the end of March, official data show, and bankers say they are under pressure to curtail risks. Local media has reported that many branch managers’ pay is now directly linked to their NPL ratio.
One would certainly expect this trend to continue because as noted last month, some 40% of credit risk in China is carried outside of traditional loans, but even if you take the figures at face value (which, again, one absolutely should not, especially as it relates to NPLs in China), the picture is not pretty.
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That's Fuped Duck!
Still not seeing this great long term central planning I keep hearing about China. Sure they are making some moves that appear prudent but so too did the Soviets. Those who think China is going to teach the US a lesson in the upcoming monetary shift may be disappointed. Oh yeah, and should be careful what they wish for.
They need new trade roots for their goods, it will take time, but for usa - what they can sell except of the war and debt?
It's pretty clear that the US and Britain both have one huge new growth industry, at least so far as foreigners are concerned.
Come in, she said, I'll give you
Shelter from the storm.
in USSR they periodically were writing off bad debts
this worked well in socialism (because capital was publicly owned) but does not work in capitalism (because capital is privately owned)
world eCONomics is a largest con game ever
https://youtu.be/Gy7FVXERKFE
Gray State isn't a con game, it's a hostile takeover by the elite, so they can get what they want, and they will do it, trust me...
Makes you wonder why they murdered the director and his whole family huh?
last man is paying whole bill and the last man is we, ordinary people...
This crash in China is not going to be pretty.
My guess is that they plan to switch to domestic consumption at some point in the near future.
I'll believe it when I see it, but that culture has proven to be extremely resiliant over the past several millenia.
And I really dig Fan Bingbing. She's pretty.
"I'll believe it when I see it, but that culture has proven to be extremely resiliant over the past several millenia."
Accompanied by a lot of bloodshed. They didn't have 1.5bln people then.
One must break a few eggs to make an omlette.
Thanks, Condoleza Rice!
And 91% male...
Maybe you could loan out that fly ridden corpse to them...... that was so wrong
Oh yah it will.
China is just the world's biggest Minsky moment waiting to happen. It will be epic.
Once everybody in China has borrowed against their homes and bought stock the way the government is telling them to do, the stock market will crash like 1929. There will be some very pissed unemployed peasants at that point.
Oligarchs won't care, as they will have long since split to San Francisco or Singapore or Vancouver.
It will be rough on anyone without an exit plan.
Whenever one big one crashes, we all crash. We are getting close to the end of the road and the can can't be kicked further. I am long on island real estate futures for the elite. I am also long guillotine manufacturers.
because they were looking for insider and i think that he didn't give them a name, so they kill his kid first.
Their economy is not all it's quacked up to be...
Duck and cover!
That's rayciss !! The banksters discriminated against Chinese ducks !
I'm just not seeing a trend in that graph. I think all is well.
Confucius say:"No pay loan, fucky ducky..."
I wish Duck Dynasty defaulted.
Quack
If a "profitable" company has to default on it's debt because it wasn't rolled over, was it actually "profitable" in the first place?
It's easy to be profitable if you don't have to pay off your loans.
I think a lot of Chinese companies have a problem with this whole accounting thing.
Over here, those are non-GAAP profits, not to be confused with GAAP losses.
they could have overextended and taken on more debt for expansions that cost more than their monthly revenue could service.
The cost of opening 3 new stores and the low initial revenue from new stores could end up costing more than what your original one profitable store can support and you become cashflow negative.
Many originally profitable businesses overextend when trying to expand and end up losing the plot. Happens in the restaurant business all the time.
It s only profitable if it has all its ducks in a row.
Silver's 14 dma is above its 200 dma. Just sayin'.
:)
Dead Ducks all around
I don't really give a duck!