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"It Is All Rather Scary" - Chinese Debt Snowball Gaining Momentum

Tyler Durden's picture




 

Submitted by John Rubino via DollarCollapse.com,

Financial crises can happen quickly, like the bursting of the tech stock bubble in early 2000, or slowly, like the late-1980s junk bond bust. The shape of the crash depends mostly on the asset in question: Equities can plunge literally overnight, while bonds and bank loans can take a while to reach critical mass.

China’s bursting bubble is of the second type. During its post-2009 infrastructure binge, trillions of dollars were lent to (way too many) producers of cement, steel, chemicals and other basic industrial inputs. And now a growing number of them can’t make their payments:

China’s Bond Stresses Mount as Two More Companies Flag Concerns

 

A Chinese fertilizer maker and a pig iron producer have flagged bond payment difficulties, adding to signs of stress in the nation’s corporate note market after at least six defaults this year.

 

Jiangsu Lvling Runfa Chemical Co., based in the eastern city of Suqian, is asking its guarantor to repay 53.1 million yuan ($8.3 million) in bond principal and interest due Dec. 4, according to a statement posted on Chinamoney’s website. Sichuan Shengda Group Ltd., based in the southwestern province of Sichuan, is uncertain it can repay notes due in 2018 that holders can opt to sell back early on Dec. 5, it said in a statement on the same website Thursday.

 

More companies in China are struggling to repay bonds amid the worst economic slowdown in a quarter century. China Shanshui Cement Group Ltd. this month became at least the sixth company in 2015 to default on yuan-denominated domestic notes. State-owned steel trader Sinosteel Co. postponed a bond payment for a second time last week.

 

The guarantor of Jiangsu Lvling Runfa’s bond is Jiangsu Re-Guarantee Co. The bonds are so-called collective notes, which are typically issued by several small- and medium-sized companies that don’t have the ability to sell securities on their own. A filing earlier this week didn’t specify the other issuers of the 6.2 percent notes that have a face value of 100 million yuan.

 

Bank of Tianjin Co., the trustee manager on Sichuan Shengda’s notes, said it will hold a bondholder meeting on Dec. 3, according to a statement to Chinamoney Thursday. Sichuan Shengda’s subsidiary’s pig iron production is in halt because of falling prices and the cash shortage, the lender said in a separate statement.

 

Sichuan Shengda and its subsidiary had a total of 514.41 million yuan of overdue borrowings as of Nov. 25, according to Bank of Tianjin’s statement.

 

The stress isn’t limited to bonds. China Fishery Group Ltd. failed to repay a $31 million installment due earlier this month on a $650 million loan, according to Standard & Poor’s. Creditor banks may have found it difficult to roll over the debt following a government investigation the company flagged in August, according to JPMorgan Chase & Co.

* * *

Furthermore, as Reuters reports, the binge in corporate debt - driven largely by liquidity - has repositioned much of this massive risk of defaults into the shadow-banking system and its ne'er-do-well clientele (which generally includes mom-and-pop reaching for yield in non-equity WMPs and local-government-owned project or infrastructure investment firms)...

Data from CN Benefit, a research firm tracking wealth management sales, shows that 60 percent of new bank wealth-management products (WMPs) were linked to debt and money market instruments in September, up from less than half in the first quarter.

 

...

 

Demand is hot for these products, and the higher the yield, the higher the risk, which is amplified if the fund's assets are partly bought on credit, or leveraged.

Investors, however, assume that products offered by big names are relatively safe.

"The risk of default is very slim," said a 45 year-old business manager in Shanghai surnamed Pan who invests in WMPs on an exchange backed by China's second-largest insurer, Ping An Group. "I'm sure such a big company as Ping An will make sure investors can get their money back."

But analysts say the narrowing corporate risk premium combined with weakening profits is a red flag for speculative activity.

"Similar to what happened in China's stock market earlier this year, the rally of bonds is largely driven by liquidity conditions and speculation that government will provide support when necessary," said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.

Some industry professionals worry that these trends, enabled by regulatory reform, will create forces that regulators can't handle when market sentiment turns, in an echo of the stock market boom that preceded the summer crash and a frantic series of heavy-handed interventions by Beijing.

"If, as seems likely, the government has succeeded in getting funding to higher risk sectors by relaxing bond approvals," wrote Christopher Wood of brokerage CLSA in a recent note, "it is all rather scary, given the regulatory failures exposed by the A share boom-bust cycle."

This won't end well...

 

What happens next? In the standard script, defaults begin to snowball as companies unable to pay off their bonds, bank loans and supplier bills cause their creditors to either fail or scale back lending, which impairs other leveraged companies, and so on, until things get out of hand. Then the government either steps in and tries to bail out what’s left of the market or stands aside and allows the bad debt to liquidate.

In actual capitalist societies, option number two is how unwise loans and “malinvestment” are liquidated to return the system to health. But lately everyone has been choosing option number one, which means socializing the private sector’s debt by recapitalizing banks and borrowers with taxpayer funds. This averts a crisis in the moment while setting the table for an even bigger mess in the future.

It’s a safe bet that China, following the developed world’s lead, will soon toss a big chunk of its foreign exchange reserves at the problem. When this fails, the next steps include QE and negative interest rates, which take money from savers and retirees and give it to banks, again with the hope of moving the inevitable crash to some later date. The result? An even more highly-leveraged world and Potemkin markets that look real but no longer are.

 

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Sun, 11/29/2015 - 14:22 | 6853102 Jack Burton
Jack Burton's picture

Where ever you look in the world you see one of three things. You see internal civil war. Or you see external terrorism attacks. Or you see uncontrollable debt spirals that will crush nations.

We could go down a list of nations. Over half the world is unstable, falling apart, [like Brazil], at civil war [like Ukraine], or facing a looming debt and balance of payments crisis [like the UK].

When and if the next debt driven collapse hits, it will hit a world already near war with battles in dozens of nations.

What I am saying is, "The world system has run out of  resilience to manage a crisis. We already have millions of migrants racing to western Europe. This is a sigh that the thrid world and even second world is falling apart.

The next collapse will dwarf 2008, everything might collapse in a matter of hours as fake bubble pop all over the world's markets and debt bubbles will sink governments at once.

Sun, 11/29/2015 - 14:27 | 6853118 I AM SULLY
I AM SULLY's picture

I believe you've summarized it nicely.

Sun, 11/29/2015 - 14:59 | 6853239 giggler321
giggler321's picture

Schadenfreude.  I can safely say it's a bit early as ZH articles have touted the end of the world since - what 2009?  and still the worlds round, dept grows, ebay exists and people pay to much for bubble assets

Sun, 11/29/2015 - 15:09 | 6853267 bamawatson
bamawatson's picture

heard a hustler say -- never predict the end of the world; you can only be correct one time

Sun, 11/29/2015 - 15:48 | 6853394 Handful of Dust
Handful of Dust's picture
US ‘Top Destination’ for China’s Fugitive Officials

 

http://thediplomat.com/2014/08/us-top-destination-for-chinas-fugitive-of...

 

It's amazing realtors, lawyers and title companies look the other way when some foreigner [Chinese, Russian, Nigerian, Iranian esp] buys a few $2 million houses with cashola ... while Joe the Plumber has the feds knockin gon his door interrogating him in detail if he withdraws [or deposits] more then $11k in cash.

 

Tell me it's not fucked.

Sun, 11/29/2015 - 15:03 | 6853220 Spiritof42
Spiritof42's picture

This is a sign that the third world and even second world is falling apart.

That's about right. From the weakest to the stronger with the US the strongest and last.

Martin Armstrong calls for the US stock markets to rise to new heights because it's one of the few places to park dollars that is not debt. Can't say if he is right or wrong, but it's something to watch for. Especially because so many expect stocks to collapse.

Sun, 11/29/2015 - 17:01 | 6853616 Fukushima Fricassee
Fukushima Fricassee's picture

FUCKING A, enough of this shit lets get down to it ! Perhaps if some of these political shits fall we can build something worth while.

Sun, 11/29/2015 - 17:03 | 6853628 Butter_cup
Butter_cup's picture

Check this legitimate ways to mak? money from home, working on your own time and being your own boss... Join the many successful people who have already used the system. Only reliable internet connection needed, no prior experience neccessary, that's why where are here. Start here... www.wallstreet34.com

Sun, 11/29/2015 - 14:26 | 6853108 JustObserving
JustObserving's picture

Kotlikoff says true US debt is $210 trillion or over $1,720,000 per taxpayer

Kotlikoff goes on to illustrate that the fiscal gap is increasing at an alarming rate and that delay makes our problem much worse. In 2003, just a little more than a decade ago, the fiscal gap was $60 trillion. But by last year it had catapulted to $210 trillion. The fiscal gap may not continue increasing as rapidly as it has over the past decade, but with each passing year - as Congress and the President do their best to avoid action - our hole grows deeper by substantial amounts.

http://www.brookings.edu/research/opinions/2015/04/08-federal-debt-worse...

End to end, 210 trillion will reach the sun 214 times. And the moon 83,000 times.

Sun, 11/29/2015 - 14:27 | 6853120 yogibear
yogibear's picture

Doubling and tripling again until it becomes uncontrollable. Once the Fed loses control it's over.  Not if but when.

Sun, 11/29/2015 - 14:25 | 6853109 yogibear
yogibear's picture

Just delay the inevitable and make it worse later. Moar QE. Stepping in to save anything big for now. 

Sun, 11/29/2015 - 14:28 | 6853121 I AM SULLY
I AM SULLY's picture

Time to print 10 TRILLION and hand it out to the bottom 70%.

Then print 50 TRILLION and give it to ... me.

Sun, 11/29/2015 - 14:32 | 6853134 I AM SULLY
I AM SULLY's picture

We will collapse, China will collapse ...

Latin America will collapse ...

The EU is going down the tubes ...

And hell - when was the last time anything good happened in Africa?

The Middle-East is a hell hole.

(fucking Australia and New Zealand)

(they might be ok)

Sun, 11/29/2015 - 15:12 | 6853281 bamawatson
bamawatson's picture

"And hell - when was the last time anything good happened in Africa?"

never

Sun, 11/29/2015 - 14:42 | 6853170 economicminor
economicminor's picture

And People of the US are pin balled from Fear to Greed to Racism to over indulgence back to Fear. Most have no real values left after decades of Consumerism fed by debt fostered on by the best psychritrists in the world. They use their vast knowledge in propagating lies and manipulating emotional responces.  Now most believe that unregulated Capitalism is Good even while it destroys their and their children's futures. It is all so unbelievable.. Like living in a weird form of Bizzaro Land..

 

Sun, 11/29/2015 - 16:14 | 6853484 NoDebt
NoDebt's picture

It's going to be entertaining watching those who have bought into those fake, made-up narratives wander around looking for the next hand-out that's not coming.  Muttering "but I was promised" under their breath.

 

Sun, 11/29/2015 - 17:16 | 6853675 MountainMan02
MountainMan02's picture

I'll teach them how to hunt/fish/ and build shelter. They'll be of use and eternally loyal.

Sun, 11/29/2015 - 17:16 | 6853676 MountainMan02
MountainMan02's picture

I'll teach them how to hunt/fish/ and build shelter. They'll be of use and eternally loyal.

Sun, 11/29/2015 - 19:18 | 6854084 wanderer9641
wanderer9641's picture

Or they will run out of fish and game and put you on the menu.

Sun, 11/29/2015 - 14:43 | 6853171 economicminor
economicminor's picture

What a crazy world we live in!

Sun, 11/29/2015 - 14:55 | 6853216 Dr. Bonzo
Dr. Bonzo's picture

Snowball faster. We're not getting any younger here. Bring it the fuck on.

Sun, 11/29/2015 - 15:11 | 6853278 Eyeroller
Eyeroller's picture

Here, here!  So tired of waiting for the shit show to start!!!!

Sun, 11/29/2015 - 21:53 | 6854661 Faeriedust
Faeriedust's picture

Can I have next year before the internet shuts down?  I still have a few trees I want to plant and a few more herbs I would have to really scrape to find locally.  And of course, I want to get my first crop of popcorn in.  Watching the Apocalypse without popcorn?!

Sun, 11/29/2015 - 15:24 | 6853318 stant
stant's picture

I am putting up my kentucky guide stones . It has the formula for whiskey , burbon , beer wine. Screw like monkeys and oh yeah the formula for concrete. The Romans fooked that up the last time

Sun, 11/29/2015 - 17:25 | 6853697 MountainMan02
MountainMan02's picture

I'll miss the internet a little. Hope we cross paths. Trade you meat for some burbon.

Sun, 11/29/2015 - 17:25 | 6853698 MountainMan02
MountainMan02's picture

I'll miss the internet a little. Hope we cross paths. Trade you meat for some burbon.

Sun, 11/29/2015 - 15:26 | 6853320 Unix
Unix's picture

,,,duh

Sun, 11/29/2015 - 15:28 | 6853327 Unix
Unix's picture

the global collapse will be EPIC, strap on your chinese nose guards, it's gonna be a bumpy ride...

Sun, 11/29/2015 - 15:50 | 6853404 economicminor
economicminor's picture

I have thought EPIC for most of 2 decades and the PTB always seem to pull just one more rabbit out of their magician's hat. Even the last 2 episodes 2000 and 2008/9 took way longer to unfold than I thought possible. And the cost to myself, as a middle class citizen who was a responsible consumer and businessman had little real impact. I had written about the possibilities and probabilities to my family and large circle of friends for years leading up to both of them and then was some what embarrased as to the lack of real consequences to any of us. Us being people I know well.

So if/when (I say when but even I am getting tired of waiting and wondering) there really is an epic event, I am sure few people will be prepared as they have had threats and fears thrown at them time after time with few direct consequences. 

In a way this is sort of like waiting for the Appoclypse to come... believing it will but having no idea when, or even if it happens in our life time.

If nothing happens before the first of next year, I'm just going to get in my RV and head for the sun and play for a while and hope I can get enough fuel to get home IF it all happens in an Epic dirge..

Sun, 11/29/2015 - 16:32 | 6853540 Unix
Unix's picture

have patience, it is coming...no need to rush, just keep preparing little by little, the progressives will crash the place one way or another...via financial fraud or civil war. it will be on them, any blood will be on thier heads.

Sun, 11/29/2015 - 15:59 | 6853428 Raymond_K._Hessel
Raymond_K._Hessel's picture

All the leveraging is creating problems for further leveraging.

Sooner or later you run out of other people's credit.

But look at the US debt, illegal immigration, exporting of jobs, abyssmal inner city schools, etc etc - the us is pretty fucked, too. I think more so.

But the thing is, almost all if this debt is bullshit debt money anyway.

And here's the rub - it is NEVER going to be repaid.

Meanwhile, in my brain what might work is helicopter money to small businesses. Not pro QE but at this point - rather have the fed at least consider changing the fucking recipients. Giving hundred of billions to lloyd and jamie has made things worse. As they necessarily would.

I think if we must print, a loan at 0% to small biz while us sovereign debt to the fed is 'forgiven' may actually create some genuine jobs growth.

But not without stemming the h1bs and influx of unskilled foreign language speakers.

No - illegal immigrants are not good for 'the economy' when the economy is bad due to a collapse in artificial demand. Only a cunt could think otherwise. Adjust guest worker visas up and down as needed.

Also, flat tax and tax cap gains at 25% and place .1% tqx ob financial transactions strictly for servicing debt. Mmm.. Less married to this one, but certainly lower taxes on people making under say 150k.

Stop spending entitlement tax rev on fucking ukrainian coups abd flechette shells for Israel. No more buying treasuries with payroll taxes either.

And fire some economists and replace with forensic accountants.

Sun, 11/29/2015 - 21:48 | 6854643 Faeriedust
Faeriedust's picture

I think your best candidate (other than Rand Paul, who has no more chance of winning than Bernie Sanders) would be Donald Trump.  He has a suitably jaundice view of putting foreigners' interests ahead of our own.  And he undoubtedly understands both the tax code and bankruptcy fairly well, having succeeded in using both to further his own gains for decades.

Sun, 11/29/2015 - 16:01 | 6853438 hungrydweller
hungrydweller's picture

"In actual capitalist societies, option number two is how unwise loans and “malinvestment” are liquidated to return the system to health."

 

Where in the world does this condition exist?

Sun, 11/29/2015 - 21:45 | 6854632 Faeriedust
Faeriedust's picture

One thing to note: China has only HAD a relatively "free" market in securities and wealth management products for about 20 years.  This is literally the first time that the PRC (as opposed to Hong Kong) has had to face a popped economic bubble.  Before that, the central government kept a tight hold on the economy and prevented excess speculation from ballooning.  So this is going to be the first experience that the average Chinese has ever had with the dark side of capitalism. It could lead to major re-assessment of the benefits of Western-style laissez-faire, since unlike Western nations, the Chinese are aware of alternative economic systems. 

Mon, 11/30/2015 - 01:40 | 6855279 conraddobler
conraddobler's picture

When Tsunami's hit the opposite happens from common sense and so it is with these manipulated markets.

It's trivial math to see it's all unsustainable but it's beyond complex to predict exactly the timing of the unraveling of the worlds largest ever finanical shell game.

I predict the end will come when the great herd of humanity finally acknowledges with their actions and wallet that it has arrived and who the fuck knows when that will be.

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