This page has been archived and commenting is disabled.
The World's Biggest Bond Bubble Continues To Burst As China Suffers More Defaults
Once China began to mark an exceptionally difficult transition from a smokestack economy to a consumption and services-led model, those who were aware of how the country had gone about funding years of torrid growth knew what was likely coming next.
Years of borrowing to fund rapid growth had left the country with a sprawling shadow banking complex and a massive debt problem and once commodity prices collapsed - which, in a bit of cruel irony, was partially attributable to China’s slowdown - some began to suspect that regardless of how hard Beijing tried to keep up the charade, a raft of defaults was inevitable.
Sure enough, the cracks started to show earlier this year with Kaisa and Baoding Tianwei Group and as we documented last month, if you're a commodities firm, there's a 50-50 chance you're not generating enough cash to service your debt:
There's only so long this can go on without something "snapping" as it were because even if Beijing intends to perpetuate things by continuing to engineer bailouts (e.g. Sinosteel), that will only add to the deflationary supply glut that's the root cause of the problem in the first place and ultimately, Xi's plans to liberalize China's capital markets aren't compatible with ongoing bailouts so at some point, the Politburo is going to have to choose between managing its international image and allowing the market to purge insolvent companies.
On Wednesday we get the latest chapter in the Chinese defaults saga as cement maker China Shanshui Cement Group Ltd said it won't be paying some CNY2 billion ($314 million) of bonds due tomorrow.
Oh, and it's also going to default on its USD debt and file for liquidation.
Here's Bloomberg with more:
On Wednesday, the creditors got their answer. Shanshui, reeling from China’s economic slowdown and a shareholder campaign to oust Zhang, said it will fail to pay 2 billion yuan ($314 million) of bonds due on Nov. 12, making it at least the sixth Chinese company to default in the local note market this year. Analysts predict it won’t be the last as President Xi Jinping’s government shows an increased willingness to allow corporate failures amid a drive to reduce overcapacity in industries including raw-materials and real estate.
Shanshui’s troubles -- it will also default on dollar bonds and file for liquidation -- reflect the fallout from years of debt-fueled investment in China that authorities are now trying to curtail as they shift the economy toward consumption and services. In the latest sign of that transition, data Wednesday showed the nation’s October industrial output matched the weakest gain since the global credit crisis, while retail sales accelerated.
“Debt wasn’t a problem during the boom years because profits kept growing,” Zhang said last month. "But it’s not sustainable when the economy slows."
Shanshui’s total debt load as of June 30 was four times bigger than in 2008, according to data compiled by Bloomberg.
Defaults in China’s local corporate bond market have mounted this year as the economy weakened. Sinosteel Co. last month failed to pay interest on 2 billion yuan of notes maturing in 2017. Baoding Tianwei Yingli New Energy Resources Co., whose majority holder was until last year the world’s biggest solar panel company by shipments, failed to make a complete payment on a note due Oct. 13.
There's also a shareholder spat with the chairman going on here, but in the end, this is story fits perfectly with the narrative as laid out above and as we've documented on too many occasions to count. This is a perfect storm involving heavily indebted producers whose businesses have become uneconomic in the face of a sharp downturn and efforts to keep them afloat have only served to exacerbate the same overcapacity problem that forced them into de facto insolvency in the first place.
So where do we go from here? Well, nowhere good and in a sign of things to come, Bloomberg also reports that Yunnan Coal Chemical has some CNY1.31 billion in overdue debt "due to continuous losses and rising financing."
As we noted earlier this month, as of this moment China has between $25 and $30 trillion notional in financial and non-financial corporate credit (in China, where everything is government backstopper, there isn't really much of a difference), about 5 times greater than the market cap of Chinese stocks (and orders of magnitude greater than their actual float), and 3 times greater than China's official GDP, which also makes it the biggest bond bubble in the world, even bigger than the US Treasury market.
For their part, BofAML thinks this entire debacle could begin to unravel in earnest in about six months and on that note, we'll once again close with the list of who's most likely to be next:
- 663 reads
- Printer-friendly version
- Send to friend
- advertisements -






Bring back Jimmy Carter and 20% interest rates.....let's get serious here.
I brought up Calvin Coolidge........nobody wanted to hear it.
Whoops, there goes another rubber tree plant Chinese rubber bond.
They bounce back off the wall and into your mouth.
Have you ever had a rrrrrrubber biscuit?
Debt can never be considered a zero sum game as Krugman would have you think. When a fool takes on the debt, it can’t be considered an asset to the creditor.
Bow, bow bow.....
Everything is Wonderful..
Why can't you people just Accept it?
Unemployment is SUPER LOW!
Home Values are BACK!
Gold and Silver Have been Wacked Down LOW!
it's a RECOVERY!
(Now get out there and SPEND!)
@dimwitted economist
You forgot to mention
High debt to income is way to high
Living cost are way up
Tax costs way up
= Everything is unafordable!
LOL
So is it or is it not "Booze, Blow & Love Monkey" time or what?!?!?!
Where is Pods??
I need to pick a bone with you sir...
Last week I laughed out loud about your 'reverse Ackman HFT fund comment' which was good.
The wife asked what I was so amused about, by the time I explained all of the dynamics involved I was divorced..
You need to come here and iron my shirts dude..
I broke up with a girl in college over the New Kids on the Block. She never could appreciate their talent.
LOL
I was telling Mrs. Cog last night I broke up with someone several decades ago because she would fry fish on the stove and fill the house with fish scented smoke that hung in the air for a week or more. The third time she did it was the last.
Are you sure that was the fish you were smelling? Just askin?
Well, she was smoking hot but..........
<But not as hot as Mrs. Cog.>
:-)
Smart boy,,, I know for a fact that she reads these posts too...
Spoctor Din
Where is Pods??
One milllllllllllllllllllion dollars.....and you can have him.
No.....I don't care what you're going to do with him.
Yeah, I would have left you too over that one.
Smart girl, backstreet boy.
LOL
Dude.....
The reason your wife divorced you is not because of Pods and the comment, but because you had her ironing your shirts. :-)
https://haarball.files.wordpress.com/2006/03/feminists1.jpg?w=370&h=300
He's busy shining my my shoes right now in the jail cell, he'll be out later, much later.
Impoverished Ps... quote
"by the time I explained all of the dynamics involved I was divorced.."
Some people get all the LUCK
All those empty cities are going to be expensive to maintain. It's best just to tear them down and build new cities in their stead.
I'm Paul Krugman, and I approved this message.
Wellllllll.......
Building those ghost Chinese cities did created an artificial demand for international commodities and credit for many years which in turn kept the international Ponzi going that much longer. While it isn't sustainable for very long, that is why we also have war. To tear down those cities so we can rebuild.
<War...the universal reclamation and Ponzi project.>
OK, in a thread with lots of clever quips this one got the liquid through the nose!
What gets overlooked in all this Chinese fear mongering is that China has a completely different financial structure to the west. In the west our central banks are owned by the criminal Rothschild cabal, who have turned us into debt slaves by loading us up with unpayable levels of debt, which they refuse to forgive. In comparison the right to create money in China is owned by the state. This means they can cancel loans that do not perform, make interest free loans and even fund ghost cities with money that is never repaid and do all this without causing what would be a disaster in the west. The reason they can do this was given by Keynes. This is that if manpower and raw materials are available adding money to fund a project does not cause inflation. Watch China come through this and move forwards leaving the west stuck in an endless depression thanks to the Rothschilds.
Ironing shirts? Pifft try having her wash soiled underwear. My ex-wife would say , " gee Bill you shit yourself a lot , why " I'd say, " you try spending your days on Zerohedge"
It's what central banks do, create ever larger bubbles.
Wewrite debtski. Why knot?
What do you folks think about the comments made yesterday regarding a "Negative Interest Rate"
And the annoucements ie.
Russia's foreign debt which look to be paid off next year, ( under 70 Billion this year)
Then there's the China/Gold up 60% and climbing, and of course, the eventual take over of Tiwain ( predicted last year )
Then there was that "little missle thing" in San Franscisco, stated as a 'normal test launch' of an unarmed TRIDENT missile. ( interestingly, I've never heard of this, and if indeed it was a 'test' launch, you and I both know they would have had every photographer from All The States, there for the fireworks. I find these highly interesting, and would very much like to hear others opinions.
oops, sorry didn't know that would post twice.
Ruh Roh Rook out Beroooooowwwwwww
Hmmm, paper promises not being kept, again. No wonder the manipulators are trying so hard to scare people away from precious metals in their hands. Less money for the casinos to steal.
seriously, were the Chinese also doing the Fed's $9 trillion carry-trade daisy chain somehow? (duh-oh)
"President Xi Jinping’s government shows an increased willingness to allow corporate failures" We could only dream of having such a free market capitalist government here in the USA.