China Starts 2017 With Highest Number Of Corporate Defaults In History

Tyler Durden's picture

Back in October 2015, roughly around the bottom of the recent commodity cycle, we reported a stunning statistic: more than half of Chinese companies did not generate enough cash flow to even cover the interest on their cash flow, and as we concluded "it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can't even generate the cash to pay down the interest on their debt, let alone fund repayments."

While commodity prices have staged a powerful bounce over the past 18 months, and despite the government's powerful drive to avoid major defaults over concerns about resulting mass unemployment, the inevitable default wave has finally arrived, and as Bloomberg reports overnight, "China’s deleveraging push has racked up the most defaults on corporate bonds ever for a first quarter, and the identity of the debtors is pretty revealing."

Seven companies have defaulted on a total of nine bonds onshore so far in 2017, versus 29 for all of last year, according to data compiled by Bloomberg. In a sign of the struggles facing China’s old economic model, most of them depend on heavy industry and construction. While it’s still far from a crisis point, the defaults shows how policy makers’ efforts to reduce the liquidity that had propelled the bond market until late last year is exacting casualties.

Cited by Bloomberg, Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen said that “weak companies can’t sell bonds, which adds to the pressure on their cash flow." As a result, "the pace of defaults will continue. It will be even more difficult for weak companies to sell bonds because corporate bond yields may rise further -- the current yield premium doesn’t provide enough protection against credit risks.”

As discussed in recent months, the Chinese central bank has been curbing leverage in money markets leading to a spike in borrowing costs...

... which has also hit issuance: making rolling over of existing debt prohibitive for many. Firms rated AA, generally considered junk in China, sold 33 billion yuan ($4.8 billion) of bonds in the first quarter, the least since 2011, Bloomberg data show. Chinese companies have scrapped 129 billion yuan of bond sales since Dec. 31, a jump of more than 50 percent from the same period a year before.

Continuing the deleveraging push, and further tightening financial conditions, over the weekend, the PBOC boosted rates on loans aimed at small- and medium-sized financial institutions while as reported last weekend, smaller and mid-size banks have been caught in the cross hairs of shadow banking deleveraging, with some said to have missed debt payments in March.

Not surprisingly, Bloomberg reports that four of this year’s nine defaulted bonds were issued by companies based in the northeast rust-belt province of Liaoning, which has been among the areas hit hardest by China’s focus on reducing capacity in industries such as steel and coal. Another key Chinese commodity producing province, Hebei, which is the nexus of China's steel-production has so far been spared as a result of lying about its production cuts, however recent revelations have prompted Beijing to crack down on local factories, resulting in the recent decline in iron-ore prices, which will likely have adverse impacts on Chinese upstream steel suppliers, and result in even more defaults in the coming months.

Courtesy of Bloomberg, here is a summary of the companies that have defaulted so far in 2017:

1. Dalian Machine Tool Group Corp.

The top perpetrator, this Liaoning manufacturer defaulted on three bonds this year, after issuing new securities as recently as October. The tool making industry has a large number of players, and is ripe for consolidation, according to Bloomberg Intelligence. Dalian Machine is also based in a province that tumbled into an outright recession last year. The securities involved include a note due in May 2017, one due in July and another due in January 2019.

2. Dongbei Special Steel Group Co.

This steelmaker based in Dalian, a port city on the Yellow Sea, is a good example of Liaoning’s troubles. The company, partially state owned, was already bailed out in the early 2000s before it had to grapple with the challenges of China’s economy decelerating from around 10 percent growth to sub-7 percent. It’s now defaulted on its sixth bond since its latest financial difficulties began a year ago. The company is in bankruptcy proceedings. The note defaulted on was originally issued in 2013 and is due in January 2018.

3. Inner Mongolia Berun Group Co.

This investment company is based in the heart of the northern province of Inner Mongolia, which saw a surge in construction during the record credit boom unleashed during the global financial crisis. Berun Group’s home city, Ordos, was dubbed China’s biggest “ghost town,” for all the vacant buildings that went up during the stimulus period. This was the second default within two months for the company, which invests in chemicals and logistics. The defaulted security was a note issued last year that was due in January.

4. China Shanshui Cement Group Ltd.

While this company is based in Shandong, a province southeast of Beijing that’s better off than its neighbor across the Yellow Sea, Liaoning, cement has become a tougher industry since regulators took steps to rein in China’s property sector. China Shanshui Cement Group has defaulted on several bonds since November 2015 after a boardroom fracas stymied financing. Its Hong Kong-traded shares are suspended. The bond in question was three-year note issued in February 2014.

5. China City Construction Holding Group Co.

This builder is based in the national capital, but Beijing’s ongoing property boom wasn’t enough to prevent it from missing interest payments. A change in the contractor’s ownership last April triggered early redemption of a Dim Sum bond, and then China City faced difficulties transferring funds offshore to repay the debt. The shifting shareholder structure has had a “serious” negative impact on the company’s ongoing ability to secure funding, according to China Lianhe Credit Rating Co. The company defaulted again early last month. The security was a bond due in March 2021.

6. Huasheng Jiangquan Group Co.

Another Shandong-based company, this steelmaker suffered “huge losses” after its subsidiary cut manufacturing of the alloy, according to Dongxing Securities Co., the lead underwriter on the defaulted bond. Premier Li Keqiang said in his address to the National People’s Congress last month that China wants to reduce steel capacity by about 50 million tons. Huasheng Jiangquan repaid the overdue amount on the debt March 22. The 800 million-yuan bond that was defaulted on was due in March 2019.

7. Zhuhai Zhongfu Enterprise Co.

A bottle maker for Coca-Cola Co., this company sticks out because it hails from Guangdong, China’s powerhouse exporter province. Zhuhai Zhongfu said in a statement last week that it’s running at a loss amid competition in the industry and weak demand. The company’s controlling shareholder says Zhuhai Zhongfu is planning to make an overdue payment by April 26 on the bond that it defaulted on March 28. The firm defaulted on a separate bond in 2015 and repaid the debt five months later.

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LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) Apr 3, 2017 10:40 AM

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bob_bichen's picture

Keep calling them out.  THey ARE running and hiding.  Keep the pressure on them.

Miraculously, the biblicism-whacko seems to have taken the day off.

The "dailywesterner"-whacko has a whole lot of new "imaginary friends" and he is hiding his links as  New "imaginary friends" include:

Comtrend (new log-on April 3)
alt-right girl
Art Van Delay

blue fin
audio feeline

post turtle saver's picture

impossibru, we had an article amongst several recently touting how China will take over the world... fake news...

1.21 jigawatts's picture

Chinese pronounce them "defarts"

Kassandra's picture

Hysterical! Thanks for that.

Yen Cross's picture

  The PBoC can stack their Reverse REPO's on their triple rehypothecated, sand castles,> mountians of copper and iron ore.

  Ohhh, I forgot about the high rise shitholes filed with sand<

NoPension's picture

Biggest bubble in the history of the planet.

I helped install a Chinese peice of shit glass machine last summer. The owner was there during the install. He is one of like 7 or 15 or whatever the fuck companies building this shit in the same town. They never could get this pile of crap to work right, it's sitting idle....getting ready to go to the lawyers...about a $650,000 investment with electric and air. The whole time I was working on this " thing " ....I kept thinking " these motherfuckers are beating us?" It's junk. Stolen tech, with no underlying understanding of the engineering. But, they have the capacity and cheap money.... fuck China. The sooner that fucking rathole blows..the better the world will be.

And oh....buildings DO NOT age well when unoccupied. No machines do. All these empty buildings will need to be demolished. Maybe that's the plan.

Yen Cross's picture

  Great comment. Thanks

    I agree %1000.00

  I hope you have a strong stomach. China's  debt/gdp is $31t...  Then again, we have "unfunded liabilites" on that $20.3t

  Turd Sandwich or Giant Douche in '18?

asteroids's picture

There ain't no such thing as a "Free Lunch/Money". The FED and the rest of the fucking money printers are going to learn this old lesson again.

Yen Cross's picture

 The  usd/jpy trade is completely caving in. It's a good thing I'm hedged eur/jpy.

   Zero movement on other Majors, Even my long usd/chf works

 I gotta do some CNY-CNH  vs eur T/A.

ds's picture

Hooray ! Every other day, you get vindicated by all the debris flying out of the Ponzi Economy. They who have a rudimentary financial economy is bragging that their real economy of goods and services shall catapult into an economic superpower where the global markets will have to pay obeisance. Really ? The massive malinvestments internally and mainly in ghost cities are visible. So are the continuing flight of capital from their People (who know better) despite increasing exchange controls. also, who do not know of zombie state owned enterprises being kep alive to provide employment. 

Cheer them on their many  concurrent ambitions (OBOR, Infrastructure Bank, internationalization of the RMB, Sout China Sea forasys, defense buildups, etc). Funding all these with their printing press ? 

hendrik1730's picture

Well, whatever is the case, the Chinese are buying physical gold at a rate of 250-300 tonnes per MONTH. So do the Russionsand Indians - on a smaller scale, AND a lot of westerners who see the problems coming and are anticipating. In addition, the US trade balance is hugely negative, idem dito budget deficits, both for many years. All Ponzi schemes end in the course of time, it just depends on the moment when enough creditors want to see their money - and it aint' there. Then the US ( or anybody behaving the same way ) goes Madoff.

Iconoclast's picture

Yep, good summation that.

pacrim888's picture

China taking all its cues from Japan mid 80's.

sinbad2's picture

Japan went down, because the US forced the Plaza accord on them.

sinbad2's picture

It doesn't really matter, it's not like the Chinese Government is going to bail them out like the socialist western countries do.

If the US had just let the banks collapse, it would all be over by now, and the economy would be growing again.

The trouble with corporate socialism, is eventually you run out of other peoples money, as the US is finding out right about now.

Iconoclast's picture

China has won, they discovered a decade or so back that they could completely pwn the global monetary system by following the Fed's lead; bringing money into existence as debt, in a fiat/fractional reserve model of utopia. Then they export all that newly minted inflation as deflation (goods) into other countries, hurrah, it can never fail, until it brings down the entire global financial system, with the unworkable burden of debt, which then breaks the spine of the system permanently.

Until then they'll build ghosts towns, import raw materials, pay with cheap exported tat and allow the great and good of their country to quietly hoover up assets worldwide with newly minted exchanged renminbi, that admins such as Bush and Reagan would have prevented Arab nations from getting anywhere near.